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EU Energy and Environment Sub-Committee Responding to price volatility: creating a more resilient agricultural sector Written and Oral Evidence Contents Agricultural Industries Confederation — Written Evidence ............................................................ 4 Agriculture and Horticulture Development Board (AHDB) — Written Evidence ..................... 7 Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) ........................................................................... 16 All-Party Parliamentary Group on Agroecology for Sustainable Food and Farming — Written Evidence ..................................................................................................................................................... 38 Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) ............................................................................................................................................... 41 Centre for Excellence in Logistics and Supply — Written Evidence ........................................... 68 Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23).............................................................................................................. 71 CRM Commodities — Written Evidence .......................................................................................... 97 Dairy UK — Written Evidence .......................................................................................................... 100 Dr Phil Dawson — Written Evidence............................................................................................... 111 Department for Environment, Food and Rural Affairs — Written Evidence .......................... 116 Department for Environment, Food and Rural Affairs — Supplementary Written Evidence .................................................................................................................................................................... 124 DG AGRI, European Commission — Written Evidence .............................................................. 129 DG AGRI, European Commission — Oral Evidence (QQ 38-51) ............................................. 141 European Investment Bank, Barclays Agriculture, HSBC, and NFU Mutual — Oral Evidence (QQ 64–73)............................................................................................................................................. 162 Farm Cornwall —Written Evidence .................................................................................................. 163 Farm Europe — Written Evidence .................................................................................................... 167 Douglas D. Hedley — Written Evidence ......................................................................................... 172 Professor Ian Hodge — Written Evidence ...................................................................................... 179 HSBC Bank Plc — Written Evidence ................................................................................................ 183 HSBC, Barclays Agriculture, European Investment Bank, and NFU Mutual — Oral Evidence (QQ 64–73)............................................................................................................................................. 186

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence ................................................................................................................................................... 187 Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) .............................................................................................................................. 195 Sir John Marsh — Written Evidence ................................................................................................. 218 Professor Steve McCorriston, Professor Tim Lloyd, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) .............................................................................................................................. 220 Menter a Busnes — Written Evidence ............................................................................................. 221 Menter a Busnes, Agriculture and Horticulture Development Board, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) ......................................................................... 228 Professor Wyn Morgan, Professor Tim Lloyd, and Professor Steve McCorriston – Oral Evidence (QQ 1-11) .............................................................................................................................. 229 National Farmers Union — Written Evidence................................................................................ 230 National Farmers Union, Country Land and Business Association, and Professor Paul Wilson — Oral Evidence (QQ 12–23)............................................................................................................ 242 National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) ........................................................................................................................... 243 New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) .................................................................................. 255 NFU Mutual, Barclays Agriculture, European Investment Bank, and HSBC— Oral Evidence (QQ 64–73)............................................................................................................................................. 277 NFU Scotland — Written Evidence .................................................................................................. 278 Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence ................................................................................................................................................... 286 Organisation for Economic Co-operation and Development, and New Zealand High Commissioner — Oral Evidence (QQ 52-63) ................................................................................ 294 Royal Agricultural Society of England, Agriculture and Horticulture Development Board, and Menter a Busnes — Oral Evidence (QQ 29-37) ............................................................................ 295 Rural Business Research — Written Evidence ............................................................................... 296 Stable Insurance — Written Evidence .............................................................................................. 305 Nick Tapp — Written Evidence ......................................................................................................... 310 Teagasc – Agriculture and Food Development Authority, Ireland — Written Evidence ..... 315 Tenant Farmers Association — Written Evidence ........................................................................ 318 Tenant Farmers Association, and National Federation of Young Farmers’ Clubs — Oral Evidence (QQ 24–28) ........................................................................................................................... 322 UK Government — Oral Evidence (QQ 74–83) ........................................................................... 323 United States Department of Agriculture — Written Evidence................................................. 345 2 of 373


United States Department of Agriculture — Oral Evidence (QQ 84-87)................................ 353 Welsh Government — Written Evidence ....................................................................................... 364 Martin Wilkinson — Written Evidence ............................................................................................ 369 Professor Paul Wilson, Country Land and Business Association, and National Farmers Union — Oral Evidence (QQ 12–23)............................................................................................................ 373

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Agricultural Industries Confederation — Written Evidence

Agricultural Industries Confederation — Written Evidence 1. What is the role of public policy in mitigating the impact of potential price volatility? To what extent should the response be a shared endeavour between the EU institutions and Member State governments? What are the differing roles of industry on the one hand and individual farmers on the other? AIC members provide individual farmers and groups of farmers with risk management products. Volatility in prices means both upward and downward price movements and there is generally benefit to be obtained from trading futures markets for forward crop years to provide a greater level of budget certainty. We believe the public policy role should be seeking to ensure these commercial risk management opportunities remain freely available for the agricultural sector and are not restrained by being enveloped in wider financial market regulation. On an ongoing basis there is merit in EU institutions, in conjunction with national governments, ensuring they have sufficient information to determine to what extent these risk management tools are being used and, through consultation with industry, to determine whether future regulatory change is necessary or desirable. 2. Should public policy responses make a distinction between support for the resilience of the industry as a whole, support for the resilience of specific sectors and support for the resilience of individual units of activity? AIC does not believe such a distinction should be drawn. In our view public policy responses should addresses the broader issues and not seek to micro manage at the individual unit level. 3. Currently, what are the key elements involved in the industry’s management of price risk? What further tools are needed? Price risk for farmers relates to the risk of prices falling below the cost of production. Price frisk for consumers relates to inflationary pressures and the associated wider social costs that food inflation brings. AIC members provide a range of risk management products, for farmers such as pool schemes, minimum premium contracts for certain quality crops and parameters which mitigate price risk for the individual farmer. These products evolve and develop over time. Rather than further tools being needed, the current requirement is to ensure wider financial legislation, eg. MiFID II, does not regulate such price risk management tools out of commercial reality by classing them as financial instruments. Agriculture operates such tools to manage the risk of product which is to be physically delivered rather than simple ‘paper trading’. 4. What effect has the commoditisation of agricultural goods had on the ability of farmers to respond to risk effectively? How are farmers to mitigate the onfarm effects of volatile global commodity markets and currency fluctuations? Far from being seen as a negative, commoditisation opens up new opportunities and financial risk management tools as part of the market development referred to above – and again the point relating to wider financial legislation is valid. Certainly within the combinable crops sector, producers have a range of tools which can be used to mitigate the on-farm effects of commodity markets and currency fluctuations. Such tools however require a degree of liquidity in order that they can operate successfully and to achieve this liquidity requires sufficient parties willing to become involved in such tools. There remains therefore a considerable education role to inform individual farmers of the tools available and their

Agricultural Industries Confederation — Written Evidence opportunities for use. At the same time however it has to be understood that these tools are not cost free but the costs related to their use have to be set against the level of risk they are being used to mitigate against. 5. What are the barriers to more effective on-farm price risk management, including longer term pricing mechanisms, diversification, co-operative working and leasing? How can those barriers be overcome and what is the role of EU and national public policy? Within the arable sector the main barrier relates, as hinted at previously, to the willingness of the individual to take up one of the range of tools which already exists. Unfortunately too many individuals desire cost free and risk free tools. Risk management in the arable sector is a mature competitive market. We would readily recognise that the options are less well developed in other sectors and it is unfortunately difficult to see how some of the tools in use in the arable sector could be readily transferred into certain livestock sectors. Many of these tools do require the presence of a counterparty to function and this seems more difficult to achieve in some of the more perishable sectors. However providing an enabling regulatory structure is one way in which governments can help alternative risk products to become more widely available. 6. How ‘fit for purpose’ are market-based instruments? Could the marketplace help to mitigate risks by providing ways of smoothing out the impact of volatility? Are there ways in which EU and national public policy could encourage, and reduce the risk of introducing new financial products? Again, focussing on our knowledge of the arable sector, the current range of instruments are ‘fit for purpose’. We see the role of EU and national policy clearly focused on understanding the presence of current instruments, ensuring the regulatory structure enables their full and proper use, and ensuring the regulatory environment welcomes new risk management tools which can demonstrate their role in managing financial risk within the sector as opposed to encouraging paper based ‘speculative trading’. 7. How realistic are terms for access to investment finance? What role is there for the European Investment Bank to support on-farm investment at a low cost? What other instruments could improve access to finance in a volatile environment? AIC does not feel it is able to provide a comment on this question. 8. What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation? The level of information available to farmers wishing to engage with market based instruments is now greater than at any time in the past. The AHDB Market Information section continues to develop its services in this area across all of the sectors it represents whilst, at the same time, AIC members and others provide information on the wide range of risk management tools they have access to. We believe that farmers are more knowledgeable than in the past and actively engage with these tools although, as previously indicated, we acknowledge that this is more developed in the arable sector than in livestock or fresh produce.

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Agricultural Industries Confederation — Written Evidence 9. What role should innovation play in creating a more resilient agricultural sector? Should more be invested in scientific research which could have the potential to transform agricultural practices? Innovation does have a key role to play in creating a more resilient agricultural sector however the EU institutions have a poor track record, from a policy perspective, in supporting innovation within agriculture. Aside from the headline issue of GM technology, DG Agri is currently considering how to regulate a number of New Breeding Techniques which do not involve transgenics. The industry concern is that scientific advice will again be ignored and regulations introduced based on emotion rather than fact. We believe that money invested in innovation will be paid back with interest in terms of improved productivity and based on the Committee’s opening view that the future implies more demand and less land, it is imperative that innovation is given a higher priority. Government support for innovation must however be structured on a longer term basis rather than the short term piecemeal approaches that are currently favoured. At both UK and EU level there is also a disincentive for many existing SME’s to become involved in the competition for funding because of the bureaucratic procedures involved in the application process. 10. How effectively does EU agricultural policy currently assist farmers to mitigate the impact of potential price volatility? Is there a need for management of price risk to be an explicit objective of the Common Agricultural Policy? EU policy provides support through the single payment. Its role should not be extended to involvement in price risk management – it has previously proved its inadequacy in this area. Its role, as previously stated, should be in terms of creating an enabling legislative environment, allowing new risk management models to be developed. 11. What long term changes should be made to the Common Agricultural Policy to support the agricultural industry in responding to price risk more effectively? Should insurance schemes play a more prominent role? We would question the role of insurance in any widespread way. An insurance approach has been tried in the past but failed to gather sufficient interest. If the opportunities are there the market will respond but from a policy perspective the focus should remain on enabling legislation rather than involvement in detailed programmes. 6 January 2016

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Agriculture and Horticulture Development Board (AHDB) — Written Evidence

Agriculture and Horticulture Development Board (AHDB) — Written Evidence Summary The Agriculture and Horticulture Development Board (AHDB) is a statutory levy board, funded by farmers, growers and others in the supply chain. It raises levies from the meat and livestock sector (cattle, sheep and pigs) in England, horticulture, milk and potato sectors in Great Britain and the cereals and oilseeds sector in the UK. The AHDB’s remit covers 75% of total UK agricultural output. Unmanaged volatility is seen as a real threat to the competitiveness and economic sustainability of UK agriculture. It is for this reason that AHDB has a strategic role offering leadership and helping catalyse innovation in this complex and challenging area. As such, AHDB will be launching its Volatility Forum in January 2016 to put a long-term focus on finding sustainable mechanisms and improving knowledge exchange within the industry. AHDB does not believe there to be a one size fits all solution to volatility. The Volatility Forum aims to take a broad and deep look at mechanisms across six main themes. Key points summary of AHDB’s response to the call for evidence:       

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Mandatory price reporting would aid commercial innovation and better farmer management of price volatility. The long term nature of farming production systems and investment makes responding to price movements challenging for farm businesses. Better sharing of information across the supply chain is critical to improved management of volatility. Evolution of the CAP has meant that farmers and the supply chain have to actively manage their price risk, but despite some developments there are unlikely to be sufficient commercial mechanisms at present. Farmers need upskilling in the business aspects of understanding risk. Different commodity dynamics means a ‘one size fits all’ approach to managing price volatility will not work. Insurance schemes need robust systems and good quality data. Premiums are unlikely to be commercially viable, requiring them to either be supported by or underwritten by the CAP. Until widespread commercial solutions are in place, there is likely to be an explicit role for CAP in managing volatility. There is a key role for AHDB’s Volatility Forum to look at a number of the issues raised in this enquiry.

The AHDB The Agriculture and Horticulture Development Board (AHDB) is a statutory levy board, funded by farmers, growers and others in the supply chain. Its’ purpose is to equip levy payers with independent, evidence-based information and tools to grow and become more competitive and sustainable. 7 of 373

Agriculture and Horticulture Development Board (AHDB) — Written Evidence

AHDB raises levies from the meat and livestock sector (cattle, sheep and pigs) in England, horticulture, milk and potato sectors in Great Britain and the cereals and oilseeds sector in the UK. The AHDB’s remit covers 75% of total UK agricultural output. The funds raised from each commodity sector are used only to the benefit of the sector from which they were raised. Levy is invested in a wide range of activities including R&D, marketing, exports and market intelligence. Because the levy is statutory, AHDB is classified as a Non-Departmental Public Body and comes under the sponsorship of the Department for Environment, Food and Rural Affairs. AHDB and volatility The presence and longer term threat of volatility in agricultural markets and impact on farming incomes is a big risk facing the competitiveness and economic sustainability of the industry. As such, the AHDB sees volatility management as a key strategic issue in which it can be involved through offering leadership and helping catalyse innovation. As part of this strategic approach, AHDB will launch its Volatility Forum in January 2016. The objective of the AHDB Volatility Forum will be to maintain a long-term focus on developing sustainable volatility management tools. This approach involves looking ‘broad and deep’ at possible mechanisms across six main themes: 1. 2. 3. 4. 5. 6.

Forward contracts Formula pricing Derivatives Co-operation and integration Strategic business Government backed

A key part of the AHDB Volatility Forum will be to improve knowledge exchange between the industry, supply chain, allied industries, policy and academia. Enquiry questions and AHDB’s response 1. What is the role of public policy in mitigating the impact of potential price volatility? To what extent should the response be a shared endeavour between the EU institutions and Member State governments? What are the differing roles of industry on the one hand and individual farmers on the other? AHDB response: Over the last 25 years the CAP has evolved from stimulating production, then managing production through to now being largely de-coupled from production. This evolution has 8 of 373

Agriculture and Horticulture Development Board (AHDB) — Written Evidence meant that farmers and supply chains are exposed to free market forces i.e. volatility. Historically, when many of today’s farming businesses were in their infancy, the CAP provided much of the price risk management required meaning the business could focus purely on optimising the physical attributes. Now though, farm businesses need skills and tools beyond the physicality of farming, although it is appreciated that direct payments made via the CAP are likely to contribute to resilience. It is possible that at the farm level, the CAP has evolved faster than the ability of businesses to adapt, given the far broader skillset required. Policy that supports professional development of skills to cope with the free market world is important to help farmers keep pace with an evolving CAP. Stronger understanding around cost competitiveness i.e. benchmarking, price volatility, the broader ‘commodity cycle’ and the need to manage it has the potential to embed mitigation at an individual business level. The modern role of the farmer is to ensure they have a competitive business. Due to variation in weather and physical farm systems, competiveness can’t be measured on a short term i.e. 1 year basis, so a long term approach to benchmarking of costs and inputs is required. Additional tools to mitigate price volatility are also available if a long term view is taken i.e. using the good times to prepare for the bad. Five-year profit averaging for tax purposes, as announced by the Chancellor earlier in 2015, could be a key piece of policy to help farmers use years of plenty to mitigate periods of poorer return. At the market level, policy needs to allow and indeed support the evolution of commercial instruments e.g. mandatory price reporting would allow more transparent pricing, upon which portions of contract pricing could be based. Price volatility is a global and pan-European issue and the nature of trade means that member state market prices are closely related. It is also the case that in order to ensure liquidity a number of markets are only viable on a European basis and not at individual member state level. On this basis a coordinated response is favoured, supported by both EU institutions and Member State governments. At the same time though it is important that policies do not contradict. Whilst the CAP is exposing farmers to more of a free market, policy areas such as the Markets in Financial Instruments Directive (MiFID), could well make it more challenging for farmers to use formal market-based instruments. Industry needs to ensure a suitable commercial environment is present which provides the right tools for a competitive business to manage risk. The farmer end of the supply chain is anticipated to carry most of the risk so integrating and smoothing the risk through the supply chain is important, without compromising its competitiveness. Sharing of information from the processor back to the grower/producer to enhance understanding, build trust and create efficiency is one example of this. Industry leaders have a responsibility to communicate through both high and low price cycles the need for a long term business view and to manage price volatility.

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Agriculture and Horticulture Development Board (AHDB) — Written Evidence 2. Should public policy responses make a distinction between support for the resilience of the industry as a whole, support for the resilience of specific sectors and support for the resilience of individual units of activity? AHDB response: Support for industry resilience as a whole is key, however any public policy must be appropriately flexible in order that it can be fairly accessed by all sectors or segments of the market. Identifying where most risk is carried and therefore most impact can be made is important to ensuring that grass roots improvements are achieved. 3. Currently, what are the key elements involved in the industry’s management of price risk? What further tools are needed? AHDB response: Volatility, ease of management and indeed impact vary by agricultural sector. This combined with different market dynamics e.g. perishable (milk) versus non-perishable (grain) means that there is unlikely to be a one size fits all solution to volatility across agriculture. In cereals and oilseeds, forward markets are well established with pricing largely driven by futures markets in the UK and in Europe. The existence of these means that merchants are able to offer products to farmers that allow them to mitigate price volatility by locking in a price, setting a maximum and minimum value, buying the option to trade at a later date etc. Despite these tools being available, uptake could often be described as variable. In some situations it is not a case that tools are not available but that they are not understood by farmers, and hence not accessed appropriately. Further support to gather the benefits of these would be beneficial. In other commodities, forward markets are far less established and challenging to establish along the lines of formal futures markets. This is due to the nature of the underlying goods (e.g. their scale and perishability) and the ability of farmers in different sectors to access and use such markets. Also the lack of transparent and robust price data is a key consideration in establishing the price even before that price risk can be managed by the businesses in question. However, where there is mutual benefit through the supply chain, there has been development of formula-based approaches e.g., liquid milk contracts based on costs of production. AHDB’s Volatility Forum could well look at what the next generation of formula price contracts look like and what data is required for their success with the aim of making such an approach more accessible and sustainable for all involved. In input markets e.g. fertiliser it is often possible to buy ahead but transparency in the markets at local level is challenging and it is not always straightforward to lock in an input cost at the same time as an output cost to secure a margin. Interestingly, this appears to be a global phenomenon, which could be covered by the AHDB Volatility Forum.

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Agriculture and Horticulture Development Board (AHDB) — Written Evidence Many businesses are currently likely to manage volatility via income rather than price management. They do this through reducing costs of production or living costs (living within the business) and by having a diverse number of income streams including direct payments. Farmers that own their land may well borrow more money during periods of low prices. The ease and viability of doing this though depends on the direction of land markets, interest rates and the attitude of lenders. Over the long-term, the cost of producing agricultural goods should be expected to rise in line with demand for agricultural inputs as global food demand grows. In addition, as agriculture embraces new technology, continued long-term investment is required. Volatility aside, this increases the amount of short and long term investment required in order to build competitiveness and productivity. Unmanaged volatility would threaten the return on this investment thus reducing confidence of those either lending or investing. Managing volatility in increasingly un-regulated markets will most likely require commercial innovation and a supportive policy environment. This needs to manage volatility in a way which doesn’t distort the market or prevent market signals reaching the primary producer. In order for free markets to work effectively, producers need to be exposed to price signals, understand what the signal is and have the ability to respond. Given the lead time to production and long-term investment required, the ability of farmers to respond to low prices by reducing production is very challenging. In essence, this means that during a period of low prices a farmer’s best option may well be to keep producing at existing levels to maintain cash turn-over albeit at a net-loss. This could well be deemed as market failure. Policy tools to manage this need to be well thought out and targeted to avoid distorting the market. 4. What effect has the commoditisation of agricultural goods had on the ability of farmers to respond to risk effectively? How are farmers to mitigate the onfarm effects of volatile global commodity markets and currency fluctuations? AHDB response: On a global basis, agricultural goods have always been commodities and have always been volatile. Evolution of the CAP has essentially removed protection given to EU markets, which are now increasingly subject to the long-running global volatility. De-regulation of the EU Agricultural markets has meant that farmers have to now actively manage their own price risk. At least a generation of farm businesses have had their price and subsequent income risk managed for them by the CAP. Clearly this is a huge challenge for the industry, which requires a broader and new set of management skills, beyond the traditional physical skills. There are no quick individual fixes to volatility. AHDB is undertaking a long-term, ‘broad and deep’ project with key industry experts to identify suitable ways of managing volatility for the modern industry.

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Agriculture and Horticulture Development Board (AHDB) — Written Evidence 5. What are the barriers to more effective on-farm price risk management, including longer term pricing mechanisms, diversification, co-operative working and leasing? How can those barriers be overcome and what is the role of EU and national public policy? AHDB response: Part of the AHDB Volatility Forum is to identify barriers to better risk management. With agriculture continuing to transition from managed to free markets, many farm businesses are unlikely to have the required management skills at present to actively manage price risk. Essentially, many businesses still take a very physical rather than a business approach to periods of low prices. This prevents the business from identifying and responding to market signals – for example it is often said that dairy farmers will ‘milk through’ low prices to maintain short-term cash flow – rather than making and taking more challenging business decisions. This ‘farmers will keep producing at any price’ phenomena removes a lot of incentive from the supply chain to help manage the price risk. If say, policy was tailored to help farmers respond better to market signals, for example targeted payments to farmers that make alternative use of their natural resources then supply chains would see more of an incentive to help manage volatility. Lack of innovation on pricing in supply chains could also be a barrier although there is some evidence of good practice in this area e.g. contracts based on costs of production. However, it’s important that any tool is fully evaluated for pros and cons. For instance, a supply chain that pays farmers based on costs of production is clearly working in favour of the farmer. However, in a period where market prices fall, the supply chain in question then becomes uncompetitive and risks losing demand. The fiercely independent nature of many farm businesses often stifles cooperation both vertically and horizontally and is in stark contrast to what is seen in many competitor countries e.g. France, New Zealand. Price ‘discovery’ is a potential barrier. Essentially how can the price be managed before the price is even known? Provision of independent data is important here and mandatory price reporting is a key consideration for policy makers. There is a clear difference between the EU and the US, where market transparency operates at a higher level due to support from the USDA for independent price reporting. Under the new US Farm Bill, public money is used to support yield, production and margin insurance. However, this is very generic, so doesn’t account for local issues e.g. localised flooding, requires very robust data and there is some debate over market distortion.

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Agriculture and Horticulture Development Board (AHDB) — Written Evidence 6. How ‘fit for purpose’ are market-based instruments? Could the marketplace help to mitigate risks by providing ways of smoothing out the impact of volatility? Are there ways in which EU and national public policy could encourage, and reduce the risk of introducing new financial products? AHDB response: Some innovations have been seen, such as cost of production contracts, but they inherently come with some downsides as described previously. Market-based mechanisms are unlikely to have kept pace with the de-regulation of the market and with the ‘farmers will keep producing at any price’ phenomena, there is little incentive for the market place to help farmers. The market place is probably the biggest potential source of price risk management for farmers though. Simple supply chain measures such as smoothing the price over a period of months rather than battling with a daily price would help the farmer stay out of the bottom market and help the processor/retailer/consumer avoid the top of the market. Ability to do this though comes down to availability of data – as discussed previously. Mandatory price reporting would help price discovery, enable the market signal to the farmer and assist commercial risk management contracts to be created based on truly independent data. Purely ‘financial’ instruments are unlikely to be of much use to farmers with business size and regulation preventing direct access. Such approaches come with an increasing amount of regulation to ensure they are not misused by speculators which itself may on occasion give rise to additional volatility. 7. How realistic are terms for access to investment finance? What role is there for the European Investment Bank to support on-farm investment at a low cost? What other instruments could improve access to finance in a volatile environment? AHDB response: There is no clear evidence to suggest that access to finance is an issue, but could be in some cases and could be more of an issue when interest rates start to rise. However, the risk of volatility and limited tools available to manage it, could be a huge barrier to making longer term investments. A loan system where repayments are linked to the output price is an interesting concept, but this moves risk from the farmer to the loan provider/ investor, which might be commercially challenging but perhaps an opportunity for state-backed schemes. Banks appear to be fairly keen to lend to farmers that own their land as debt to asset ratios look generally favourable. However, for farmers with limited assets such as tenant or contract farmers, ability to secure finance and the impact of volatility are more pressing issues. This is important as anecdotally, the businesses / individuals that farm the land are 13 of 373

Agriculture and Horticulture Development Board (AHDB) — Written Evidence becoming increasingly detached from land ownership. With this in mind, lending longer-term into agriculture could be more challenging and less informal than, say, overdrafts. This may well challenge the industry to think how commercial finance to agriculture works and how it flexes around the commodity cycle. In effect, products that allow farmers to save efficiently in good times to offset the bad are an interesting proposition and one the AHDB Volatility Forum could investigate further. Crowd funding is sometimes referenced as an alternative to more mainstream sources of finance, but limited willingness to cooperate could be a significant barrier in UK agriculture. 8. What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation? AHDB response: Interactions between farmers and their suppliers/supply chains is largely transactional – trading based on today’s price. So this limits the ability to engage with more sophisticated products. To justify use, larger volume trades are typically required, which is where a level of co-operation would help. AHDB’s Volatility Forum could be one avenue to help volatility, with the potential to lead to a shared knowledge hub with tools and innovation for the industry. AHDB’s Monitor Farm Programme which currently runs in the cereals and dairy sectors is also an important tool which uses ‘real time’ examples to encourage farmers to engage with business planning skills. Linking base level business planning skills e.g. identifying costs of production with direct payments, would act as a significant incentive. Skills remain very much focused around the physicality of farming rather than business skills. The basics of cash flow planning can be very useful as well as considering more sophisticated skills such as margin sensitivity to changing prices and full risk likelihood/impact assessment. 9. What role should innovation play in creating a more resilient agricultural sector? Should more be invested in scientific research which could have the potential to transform agricultural practices? AHDB response: Business/ economic innovation at the supply chain and farm level is critically important to tackling volatility – to enable the industry to build a sustainable approach. However, as mentioned before, there is little incentive for supply chains to innovate due to the ‘farmers will keep producing at any price’ phenomena. Business innovation in the farm business to enable market signals to be interpreted and acted upon with more responsive production is important, but likely to be limited. Scientific innovation helps build competitiveness and productivity, but is likely to do little to help manage volatility and if physical innovation requires greater investment then it could in fact amplify the impact of volatility. Although, competitiveness and productivity are 14 of 373

Agriculture and Horticulture Development Board (AHDB) — Written Evidence important in broader industry resilience. Investment via AgriTech for example, should provide further scientific innovation to help build competitiveness and so resilience. With a key element of market failure being the inability of farmers to economically ‘switchoff’ production during periods of low prices; the importance of non-market distorting policy innovation is likely to be an important factor. 10. How effectively does EU agricultural policy currently assist farmers to mitigate the impact of potential price volatility? Is there a need for management of price risk to be an explicit objective of the Common Agricultural Policy? AHDB response: Volatility is likely to remain a key threat to EU agriculture going forward, and to farm businesses could be argued to be more significant than climate change – although the two in some regards can be linked. Any policy involvement with managing volatility should be careful not to distort the market. Although the ambition should be to find as many solutions to volatility in the commercial world as possible the physical lead in times to production may well mean that policy-based tools are also required to achieve a satisfactory level of management. Volatility should be expected to remain a challenge in the long-term. Until satisfactory commercial approaches can be seen to be widespread in the industry to help farmers with the ‘thick end’ of the risk in the supply chain, perhaps there is more of an explicit role for the CAP. 11. What long term changes should be made to the Common Agricultural Policy to support the agricultural industry in responding to price risk more effectively? Should insurance schemes play a more prominent role? AHDB response: As it stands the CAP provides passive volatility management / resilience in the form of blanket direct payments. If there was a desire to make the CAP role in managing volatility more active, there are likely to be a wide range of options available, depending on how much innovation is catalysed and the level of political intervention in the negotiation process. With this in mind, what the CAP can achieve on volatility management shouldn’t be underestimated. Insurance schemes could play more of a role, but it is important that possible solutions could come from beyond this arena. Margin, yield, income and other types of insurance are a popular approach in the US, but would need good quality data and robust systems. As in the US, premiums would most likely need to be subsidised. With traditional insurance the policy covers high impact, low likelihood events. In insuring volatility though, the events are high impact, high likelihood, which would make premiums commercially unviable. This would likely require the CAP to subsidise premiums and/or underwrite the risk. 30 December 2015 15 of 373

Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37)

Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29– 37)

WEDNESDAY 13 JANUARY 2016 11 am Witnesses: Sir Peter Kendall, Eirwen Williams and David Gardner

Members present Lord Trees (Chairman) Lord Curry of Kirkharle Viscount Hanworth Lord Selkirk of Douglas Baroness Sheehan Viscount Ullswater Baroness Wilcox ________________ Examination of Witnesses Sir Peter Kendall, Chairman, Agriculture and Horticulture Development Board, Eirwen Williams, Director, Menter a Busnes, and David Gardner, Chief Executive, Royal Agricultural Society of England

Q29 The Chairman: Welcome, lady and gentlemen. Thank you very much for coming and giving us your time and expertise. As I was saying to you, David, this session is very gentle. We are just trying to inform ourselves about price volatility and agricultural resilience, which is a matter of considerable contemporary interest. To remind you, this is a formal evidencetaking session of the Committee and a full note will be taken. It will be put on the public record in printed form and on the parliamentary website. You will be sent a copy of the transcript and if you wish you may revise any minor errors. The session is on the record. It is being webcast live and will ultimately be accessible on the parliamentary website. You have been provided with copies of members’ interests, but if members of the Committee have other interests to declare, can they do so when they begin? You have had copies of the

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) questions which we have divvied up between us. I invite you to introduce yourselves and to say a word or two about your background, as that would be helpful. Sir Peter Kendall: Thank you very much indeed. I am Peter Kendall. First and foremost, I always like to state that I am a practising farmer. I was on the farm this morning for a few hours before I was able to travel down to London. I grow cereals in Bedfordshire, 40 miles north of London, and I do quite a bit of contract farming for other people, which demonstrates some of the consolidation that has gone on in the sector, where farms have had to get bigger to be more robust and resilient, which we shall touch on in due course. I was president of the NFU for eight years. I stood down in 2014 and became chairman of the AHDB in April 2014. Eirwen Williams: Good morning. I am Eirwen Williams, director of Menter a Busnes. We deliver a knowledge transfer programme for farmers in Wales called Farming Connect. We have been delivering elements of the programme since the beginning in 2001. Since 2011 it has been amalgamated into one programme in Wales, which includes knowledge transfer, innovation and advisory services. We deliver that in Wales on behalf of the Welsh Government. I am also a partner in a farming business at home, although I must confess that I probably do not do as much as Peter does. My husband and my son farm at home. The Chairman: Thank you. David Gardner: My name is David Gardner. I am chief executive of the Royal Agricultural Society of England. I also run a charity called Innovation for Agriculture, which is a consortium of 15 English agricultural societies using their network for knowledge transfer to farmers. That is where my interest lies. Our current work streams are around soil organic matter and precision livestock farming. My background is in farm management with the Cooperative farms group over many years, where I managed a variety of enterprises, including such as cereals and dairy, and fruit businesses more recently. I am still a non-executive of a farming business in East Anglia that farms root crops, wheat and rape. I did a Nuffield scholarship in 2009 on new technologies, looking at what was going on around the world. The other thing that I think is relevant to today is that during the last crisis, in the early noughties, I ran a Defra programme called Risk Aware, which addressed a lot of issues to do with low prices and how farmers might deal with them. Q30 The Chairman: So I am sure you will help us a lot. That is very appropriate. I have taken the Chairman’s prerogative to kick off with the first question, which is about the role of resilience in responding to risk, and I will keep it very simple. The question to all three of

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) you is: how can agricultural resilience be improved? Sir Peter, you are conducting a volatility forum this month to find sustainable management mechanisms for volatility. Perhaps in your answer you could tell us a little about the sort of solutions that you would expect to emerge from that. Could you each answer in turn, but by all means chip in? Members of the Committee are free to ask supplementary questions. Sir Peter Kendall: First of all, Chairman, it is an enormous subject to try to deal with when three of us are answering the question. It is worth starting with a bit of scene-setting. We have moved on significantly from the days when, a long time ago, the UK set farming prices—the president of the NFU would go in and negotiate prices. We then went to the common agricultural policy, which was very much a market support mechanism as well, with intervention and headage payments. That has now all been unravelled at a time when, globally, agricultural markets have reduced support. We have seen mind-blowing volatility— the sort of peaks and troughs that I do not think anybody would have appreciated. I will talk about cereals, which is the sector I know very well indeed. In 2008, I sold soft wheat for making biscuits for £240 a tonne; this week, we are loading out the same product for £105 a tonne. There are the same extremes in the dairy sector, where two years ago, farmers might have been receiving 34p per litre, whereas today some farmers are receiving 16p per litre. That sort of volatility is completely new, as we have unravelled market intervention, and farmers are having to come to terms with it. Our role at the AHDB is very clear: we should help farmers to be more competitive and resilient and help them to have the tools to grow their businesses in a sustainable and competitive way. We think it is absolutely vital that we take a lead role in that because we have a regular dialogue with the bulk of levy payers; it varies according to which country, which devolved region of the UK and which sector we operate in. We think that we have unrivalled access to levy payers, but there is also a market failure to provide instruments and education around those instruments to help farmers to live with the new world that I have talked about. The volatility forum, to come to the crux of your question, is an attempt to try to pull together the academic world—everybody in farming is talking about the volatility that I have just outlined—where they are scratching their heads about the options available to us, the commercial world, which has already developed different instruments, and the third tranche, the farming community, who are not taking them up readily enough. It is a change of mindset.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) I will give you a slightly light-hearted example. I engaged in establishing and registering our family business to trade options, to be able to buy futures contracts and options for cereals. My mother, who is 87, is a partner in the family business, and by the time I had taken her passport and one of her utility bills she was convinced that she was going to be sitting at the entrance of the farm on a suitcase as I gambled away the farm. From a fairly simple commercial arable background, having to register and be involved in all those financial instruments to manage risk is a big change of mindset. The volatility forum will try to pull together practising farmers, the commercial world and the academic world to make sure—this is really important for us to stress—that we do not just do this when times are bad, because we all talk about volatility when things are on the floor. With £240 a tonne for soft wheat, barring going down the pub and celebrating, you do not think much about volatility. We need to make sure that it is a long-term piece of work, accepting that commodity cycles go up and down. We will come out of this, but we must not forget about those instruments of planning. David talked about his work at the start of the 2000s. How do we embed that? There are a number of areas that we are really keen to look at, whether it is forward contracts, forward pricing, the use of derivatives, co-operation and integration, people creating more strategic balanced businesses or how government policy might be involved to help us manage some of that volatility. Eirwen Williams: With Farming Connect we have different types of activities, and hopefully they all address the question about looking at the risks, how we can manage volatility in agriculture and making the farming business more sustainable for the future. First, we have discussion groups that benchmark against each other, which is crucial; farmers need to know where they are compared with their fellow producers. Getting farmers to engage in benchmarking is not at all an easy thing to do, but once they are engaged they see the benefits. Since October 2015, when we started the new contract for Farming Connect, we have established 36 discussion groups across Wales: 10 of them are dairy and the rest are red meat. They all participate in a benchmarking scheme. We have developed a new scheme called Measure to Manage, which is a first step to see where they are and whether there is any way they can improve the management of their business. We are also looking at new ways of bringing more income into farms. You have to be innovative. I was reading a report from the Oxford Farming Conference last week about innovation and its importance to farmers. We are trying, through a scheme we have called Agrisgop, to bring people together to look at new ideas, to work with people. We are

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) actually trying to develop people so that they in turn develop their businesses. At the moment, prices are bad, the weather has not been good and half the producers in Wales have not yet received their payment from the basic payment scheme, so people are not very confident about the future. We need to work with people. You cannot be innovative unless you have confidence, so we have to work with people and develop individuals so that they can develop their businesses. We have examples through the Agrisgop programme of groups of people who have managed to secure contracts. For example, there is a Welsh black beef producers group that sells directly to Waitrose, and they are getting a premium for their produce. So we need to work more with groups like this. We also need to encourage the uptake of new research and development. We are establishing a knowledge exchange hub with IBERS, looking at the latest research in agriculture and translating it to the agricultural community. A lot of research was done in the past, but perhaps it is sitting on shelves gathering dust. We need to be able to communicate it to the industry so that people know what the latest innovation and research is, and how they can use it to benefit their businesses. The knowledge exchange hub that we are launching at the end of this month, together with EIP Wales—the European Innovation Partnership—and things like this will, we hope, encourage farmers to look at innovative ideas in agriculture. We try to communicate the latest information, for example, on animal health and welfare, because it poses a big risk for farmers if there is a new disease. We hope to get hold of that information and communicate with farmers so that they have knowledge. It is so important to have knowledge. Somebody once said that in a period of change the amount of knowledge you need must exceed the rate of change. So it is all about giving people the tools to arm themselves against the risks. The Chairman: That is very helpful. You mentioned knowledge sharing and innovation, and we are going to come to those in more detail in a minute. David Gardner: My first point picks up on Peter’s point; volatility is normal and it is here to stay. In many ways, the question we ought to be addressing today is how we help farmers to get through the bottom of the trough, bearing in mind that, when we are in a trough, we do not know how long it is going to last—which is where we are right now. I see, broadly, two types of farming business developing: commodity producers and niche producers. Niche production should be encouraged. It adds value overall at the farm gate, and niche producers tend to be insulated from commodity movement; they are much closer to the marketplace.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) Having said that, there is a limit to how big the niche market can be. The reality is that the vast majority of what farmers produce will be traded as commodities, bearing no more provenance than the red tractor, and will be subject to the vagaries of the global market that Peter has already talked about. The focus for farmers who are commodity producers has to be on the cost of production, understanding their costs of production and driving them down. Both previous speakers mentioned benchmarking, which is fundamental to that. Peter mentioned business structures and the adoption of new technology to drive down the costs of production. You said you would come back to technologies and so on, but knowledge transfer, certainly in England, is completely dysfunctional. Of course, if you can drive down your costs of production, you make your business more profitable during the good times, which strengthens your business and gives you the opportunity to get through the tough times, which is key. We should be aiming to develop world-class businesses that do not haemorrhage cash during the bottom of the trough, which is slightly different from not making a profit. They do not haemorrhage cash, so they can tread water. I know of businesses in several sectors that are doing that right now; they are not making money but they are not losing cash. It makes them very resilient. I would like to draw a distinction between resilient farm businesses and resilient rural businesses. Diversification is key, particularly for the smaller family business, where they can broaden their income base. There is passive diversification, by which I mean things like solar panels, wind turbines, barn conversions for offices or industrial lets and so on, using the natural capital of the farm to develop other income streams. There is also what I would call active diversification, which is another business that is run on a day-to-day trading basis. It could be closely aligned to the farm—food production and so on—or it might be something completely divorced. It might be one member of the family business working as an architect in a converted office on the farm, bringing in another income stream, which gives them resilience to move through the low points of the trough. I made a note about price management tools, and I suspect we will come back to that. I have made the inevitable note about receiving payments from the basic payment scheme on time. The other point that I would like to pick up is that we are particularly weak on dealing with endemic animal disease, and probably weaker in England than in the devolved parts of the UK. I do not just mean TB. It is wider than that. That weakens our resilience and affects our

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) production costs. It impacts on all of that. That is a factor that could help if we had a much more proactive approach to it. The Chairman: As a veterinary surgeon, I am pleased to hear it. In general terms—I do not know if it is helpful—I am trying to think of solutions to the problem on two levels: the micro level, which is what the individual farmer can do, such as improving their competitiveness, diversification and so on; and the macro things at institutional and national level, such as insurance systems, futures markets, encouragement and so on. There seem to be two levels of addressing this. Could we move to knowledge sharing and information? Q31 Baroness Sheehan: In the next set of questions we are going try to explore in a bit more detail what the knowledge requirements are and how any knowledge gaps can be filled. The first issue, before we move on to that, is to have a conversation about whether farmers are genuinely interested in participating in information and knowledge-sharing activities. Eirwen mentioned some of the barriers to communication, and maybe we can explore those a little more. For the benefit of the Committee, I will take question (d) next. Where do you see the biggest knowledge gaps in farmers’ understanding of risk and how can those be filled? Sir Peter Kendall: When you say “the biggest knowledge gaps in farmers’ understanding of risk”, I go back to my point about our being in a new place, probably for the first time with so little support. If I touch on dairying, I have to go back to the fact that we used to have dairy quotas, and they have now been abolished as well, so this really has been a new beginning for farmers to understand. I am quite encouraged by some of the attendance we are now getting with the levy boards. I talk to beef and lamb producers in England—beef and lamb is just England; Scotland is separate and Wales is separate—and we reckon there are 55,000 beef and lamb producers, 29,000 of whom are engaged in our knowledge exchange work to some degree or other. We have had some really good feedback on our better returns programme, which is funded by the rural development programme, with really high scores about people getting benefits from it. The challenge at this moment in time is that although farmers are excited—I know from my own farming experience that we love new technology; we love the idea of doing things in a different way—I do not think we have enough focus yet on price volatility, and on the extremes I talked about right at the start. The comments that Eirwen made about getting farmers to understand how they can eradicate disease, be more efficient and more productive is almost in our DNA as farmers, but we have to understand risk and volatility, almost accepting the commodity cycle. When

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) we saw milk at 34p a litre, it would not have been rocket science to predict that, around the world, everyone was going to put their foot on the throttle. We saw new cows being put to the bull. We saw expansion in New Zealand and massive production increase around the world. So part of the answer to the question is trying to establish that the commodity price cycle exists and that it is going to have more impact on our business. That is a new dimension for us to talk about, rather than the functional, practical work of how we can be more efficient. The other point I want to pick up on, if I may slightly sidetrack, is what is important about the competitiveness that has been talked about by both of the other speakers. The better we can be in our businesses at being efficient, the later we will be into loss-making and the sooner we will be back into profit-making. David talked about being cash neutral; you might still be making a loss as regards your depreciation and other costs, but you are not haemorrhaging money. We need to be focused on being globally competitive. Benchmarking is a word that, unfortunately, turns a lot of famers off. I keep asking the guys at AHDB, “Can we find a word other than benchmarking, because it is seen to be almost like a schoolmaster lecturing farmers?” How do we find another way of saying, “Let’s just see how good we are. Let’s see what our competitors are doing in northern Europe and around the world”? Then we can see where we have to be when the peaks and troughs hit. That is the challenge. I do not think that we have given enough focus, hence our volatility forum, to start farmers thinking about the commodity cycle. Q32 Viscount Hanworth: May I ask you to reaffirm the assertion you made, which is that there is a perverse response globally to the lowering of prices, namely, that farmers increase production in order to maintain income? I think they were your words—farmers will keep producing at any price phenomenon. Is that your phraseology? I would like a further assertion and reaffirmation of what you implied. Sir Peter Kendall: I am not sure I go along with that. If you look at New Zealand today, there is a really big shakeout going on. Cows are being culled in the dairy sector to reduce the exposure to loss. We need to react. I am an arable farmer, so fields that do not yield as well—they cost me too much in weedkiller, for example—need to be taken out and parked. We need to break the response that I just go out and plant more or produce more. I need to be really focused on how I can manage the costs to make sure, as David said, that I remain as cash neutral as possible in the downturns. It does happen, and there is an example

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) at the moment, that some dairy farmers have increased feed to their animals to try to milk them more— Viscount Hanworth: To maintain their milk yields. Sir Peter Kendall: But I do not think that it is a long-term response. David Gardner: Peter and I were at a conference in November where a wonderful quote was made by a guy from the States, who said: “The best cure for high prices is high prices, and the best cure for low prices is low prices”. If you think about that, when prices are high people push up production and the price drops back, and vice versa. Although I agree with Peter that individual farmers will try to push production forward, if you look globally, if you take the cereal markets, for example, there are areas in Australia, the States and so on where they just do not bother to drill when prices are low, and it chokes back global production. So an element of what you suggest goes on with individual farming businesses, but, around the world, production responds to price; when prices are high the foot goes on the throttle, but when prices are low it is choked back. Viscount Hanworth: A consequence of bankruptcy, I am sure. Can I proceed? The Chairman: I am just watching the clock. It is early days yet, so could we move to Viscount Ullswater? Perhaps some of the points will be picked up anyway. Viscount Hanworth: Surely. Viscount Ullswater: You identified a change in CAP policy during the recent past, and that has altered the climate now. Do you feel that young farmers need different skill sets to cope with what is a new challenge? What training and skill requirements arise from this new policy focus? Sir Peter, you put in your evidence that public policy should support the professional development of skills to help farmers cope with change. Are young farmers being pointed in the right direction and what skill sets will they need? Eirwen Williams: Young farmers have an advantage in one way, because they will be more able and up to speed with new technology, although perhaps I am stereotyping. They will be keen and enthusiastic, but of course they do not have reserves in the bank when the price goes down. In Wales we recently launched the venture programme, which is a joint opportunities platform, where we try to match people who are thinking of exiting the industry with people who want to come in. It is a matching programme. It was launched recently at the Welsh Winter Fair. We have a roadshow of events coming up at the end of January and the beginning of February. Young people will be able to access a mentoring service where they can have the expertise of an older or experienced person to help them.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) They will be able to access 100% funding towards establishing a plan for themselves and the person who is thinking of renting the farm to them, in either a contract-farming or a sharedfarming business. Lord Curry of Kirkharle: How is that funded? Eirwen Williams: It is funded through the rural development plan and the Farming Connect project, which are funded by the Welsh Government and the European Union. The Chairman: Does any other member of the panel wish to make a comment? Sir Peter Kendall: If we are looking at the issue in a really analytical way, young farmers have less resilience because they may not have land ownership or reserves in the bank, but I am always blown away by the enthusiasm and ability of young farmers to adapt. They drive a tractor for somebody else on a night shift or they work for someone else. They are tremendously driven. One of the great things that has come out of the last 10 years of farming is a new range of youngsters coming into the farming industry. Some of them are having a really tough time because of the volatility that we have just talked about. Why are they resilient? As Eirwen said, they have new skills, which is really valuable to someone like myself, an older farmer. Young people help us to adapt to some of the technology that is available. They really are a vital part of the future. The training that is now being given in agricultural colleges is equipping them to understand the markets as well as the technology that will play a fundamental part in our being competitive in the future. The Chairman: Do you want to say anything, David? David Gardner: Lack of business skills is an issue across the sector as a whole, although clearly not in all farming businesses. There is a fair bit of evidence floating around that we do not compare well with some other industrialised nations as regards the skill set of our farmers. There is no chartered status for farmers, and that is an opportunity that could be addressed. The other speakers commented on the ability of young farmers to adopt new technologies; they are more comfortable with all these iPhones et cetera than those of us who are a bit older. We need to ensure that the next generation has the skill set that the sector needs right across the board. I agree with Peter that some very good work is being done in the colleges, but there is also an opportunity to work more closely with young farmers’ clubs and make them a vehicle that can help to upskill people coming into the industry.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) Baroness Sheehan: It is very encouraging to hear that there seems to be a lot of enthusiasm among young farmers in spite of the downturn that we are experiencing. Have you seen any drop in the numbers of new entrants? Eirwen Williams: No, we have not. Our experience of working with young farmers is that more people are interested in coming into the industry. Our challenge now is to make sure that they have the opportunity to get their foot on the ladder. Numbers in the agricultural colleges—I am speaking for Wales—are up, so there is definitely an interest in becoming part of the industry. Baroness Sheehan: Before I move on to the other sections, I want to ask you about young farmers and their use of new media. I appreciate that they cannot all access new media, but have you any idea of the range of issues that they experience in accessing rural broadband? Eirwen Williams: It is a problem. I do not have statistics on how many people have experienced problems, but it is a problem. It is not fast enough to download videos. On our website we have videos and little podcasts of different things that farmers are able to download, but because the internet connection is not fast enough they cannot download them, so it is definitely an issue in rural Wales. Sir Peter Kendall: It is a massive challenge to get this right for the farming industry as it moves into the future. As I said at the start, we farm 40 miles north of London. My brother’s speed is half a megabyte per second, and that is at 40 miles. We are 15 miles away from Cambridge, yet in that part of the world broadband coverage is appalling. We had a problem on the farm a few weeks ago trying to change a bearing on a drill; my young guys go to where they can get a decent signal on the phone and they watch a video for about 30 seconds on how to change the bearing. That is the way we shall be exchanging knowledge going forward. The chief executive at the AHDB is Jane King, who used to be editor of Farmers Weekly. The last figure I heard was that for all their electronic downloads, over half the articles are now read on phones. That tells you how things are changing. If we want farming in the UK to be cutting edge, we have to sort out our mobile phone coverage, which even in my part of the world, 40 miles from London and 15 miles from Cambridge, is diabolical. Broadband is unbelievably variable. I hate to think what it is like in Lord Curry’s part of the world. David Gardner: Let me point out that, when you hear that 93%, 94% or 95% of the UK has such and such broadband coverage, guess who the 5% are who do not have it.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) Q33 The Chairman: Before we leave knowledge sharing and information, could I just ask a question provoked by written evidence we received from the NFU? We will perhaps go back to that, but you are all involved in knowledge exchange; you have said how important benchmarking is and so on. Let me quote the NFU, which says: “Currently the main area of concern for our members is around data protection, ownership and enabling farmers to get value from any data they collect”. Can you comment on that? I was intrigued by that. Do farmers resent giving their information away? Sir Peter Kendall: This is part of the discussion about big data, the internet of things. It is certainly something that is going on in the United States at the moment where the John Deeres and Cargills of this world want to hoover up everything we do as farmers. The debate that is going on, which is still to be resolved here, is who owns the information and to whose benefit. If it is to the benefit of big business, I would like to think that we could have a grown-up discussion where everybody benefits collectively, because if people know what I am using, my machinery and the state of my crops, the just-in-time production of agrochemicals or fertilisers can be linked together. We all become collectively more efficient. The danger, and the concern that I assume is being expressed by the NFU, is that it is used not to help but to maximise returns to those big businesses. Eirwen Williams: The question you asked earlier about actually engaging with people and getting new people in is always difficult. We found that, when we were recruiting new members to our groups, one of the main worries was that they wanted their information to be confidential. We were told by the chairman of one of our groups, Euryn Jones from HSBC, that their initial reaction is that they are worried about sharing their information with fellow farmers, but once they get over that stage they feel confident. The problem is that the data goes out from that room to other people and it should not; it should be confidential within the group. Also, it is one thing measuring, but you have to act on what you have measured. You mentioned how many people have turned up to meetings with AHDB. That is just one thing. We tried to measure the outcomes of those meetings. From a recent study that we made, nearly 60% of farmers who have attended knowledge transfer events have actually made a change. That is the important bit—that they go ahead and do something different. Viscount Hanworth: There is some indication or evidence that there are problems with price discovery. I am not quite sure whether that is a question of the obtuseness of some

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) farmers or the inaccessibility of decent evidence on what current prices are. Can you comment briefly on that? How could price discovery be enhanced? Sir Peter Kendall: My educational background was agricultural economics, many, many moons ago, so I have always taken an interest in how markets work. Mandatory price reporting is something we talk about in our written evidence to the Committee. Why? Because the more information that is available, the better the decisions that can be taken. We do not have mandatory price reporting in a way that we think would be beneficial. Obviously, it could be done in a confidential way, but some of the big grain companies would rather that there was not complete transparency. For farmers to plan and to understand how markets are moving, mandatory price reporting would be an advantage, particularly given the volatility that we have had in recent times. Viscount Hanworth: Do you have some legislative proposals that you could forward to us? Sir Peter Kendall: I work as chairman, reporting to the farm Minister, George Eustice. I do not make recommendations about policy, but one of the things we said in our evidence is that one area that could be considered would be mandatory reporting, and the pressure groups, the representative bodies, might want to act on that and challenge the Government about making some proposals in that area. Viscount Hanworth: Thanks. The Chairman: Let us move to innovation. Q34 Baroness Wilcox: You have answered a lot of the questions that we might ask. I come from the fishing industry, which is very different from farming, yet it is not. As I listened to you, it brought back all sorts of things to me; for example, how proud people are of the skills they have. One boat and one fisherman is completely different from another, as is one farm and one farmer. We must not assume that they are all the same people all doing the same thing, because they are not. That is the uniqueness of the wonderful soil we have; it is the same in the wonderful amount of fish we have around our country. We are very blessed with that. I feel very sorry as I listen, because I know exactly what happened to the fishing industry as it had to go through what was an attack of technology. People saw that they could rape the sea. In came the technology to do it so they did it, but not knowing quite what was happening and taking out years and years of fish breeding by doing it. I have a lot of sympathy for what you said. I am encouraged by the amount of innovation that seems to be coming from all three of you that I had no idea about. The general public have no idea

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) what a farmer is any more. I am quite sure that farmers now have to think of themselves as growers, traders and marketers, so when we ask about innovation, it is not just innovation from technology. Is it innovation in the way they think? Is it the fact that groups of people who have never farmed before will become the people who are successful farmers? David Gardner: People who come in from outside the farming community bring a different perspective. They do not have baggage, if you like. I have always felt that in any business, in any community, you need a mix of people for it to be healthy. You need people who have been there a long time, who have long memories and understand the whole situation, but you also need people who come in and challenge the status quo. You make a very valuable point. It is quite difficult for young farmers to come in and establish themselves in the sector. Having said that, it is probably easier today than it was when I was young. The various land arrangements are much more flexible than they were 40 years ago when we had threegeneration tenancies and nobody would let land. There are opportunities. The industry needs a mix of new entrants. Of course, farm managers represent new entrants coming into the industry. I come from a non-farming background and I made my career in farm management. I represent somebody coming from outside the industry, potentially without some of the baggage that you inevitably get when you have been in the industry for a long time. My view is that you need a mix. Eirwen Williams: There is a gap between the way we communicate with people who are not in the countryside or in rural settings. As farmers, we may need to do more to communicate with other people. It should be easier today with technology and social media. We have some work to do in that respect as well. The Chairman: Innovation usually comes as a result of research, which brings us to Viscount Hanworth’s question. Q35 Viscount Hanworth: Can we expect any significant advances in agriscience in the near future and, if so, what might be their potential impacts, particularly as regards enhancing the resilience of farmers in the face of volatility? David Gardner: I said earlier that I did a Nuffield in 2009 looking at technologies around the world. I concluded that the real transformational stuff over the coming years will be in two areas. One is in our understanding of the whole genome—I do not necessarily think that means GM—and our ability to drive resistance both in plants and animals, and other traits that are desirable. The other area that I think will be transformative is the whole sensor technology and robotics area, which we could broadly package up as precision but which is

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) probably broader than that. It goes into the whole robotics area as well. Personally, I think that we ain’t seen nothing yet in terms of what sensors are going to be able to do for the industry as we go forward. Robotics tends to come in huge leaps. You suddenly get a robot appearing that will do something for farmers. The technology certainly moves. Whether its adoption moves in huge leaps is another matter. It may take time to be adopted throughout the industry. I suppose it depends on how cost-effective it is. Those are the two areas that I believe will be truly transformational over the next 20 years. Viscount Hanworth: When I think of robotics, I think of milking cows with robots. David Gardner: Yes. Viscount Hanworth: You also said that we are pretty bad at coping with endemic disease. In what way? Can you expand on that? David Gardner: The mismanagement of TB over the last 40 years is absolutely unbelievable. We are slow on the uptake in pursuing high herd health status right across the UK herd and flock, particularly in England, and we ought to be flushing diseases like BVD and so on out of the system. A developed country like ourselves, one of the most developed countries in the world, ought to have the highest herd health status of anywhere. The reality is that we do not. Viscount Hanworth: How can farmers take advantage of the latest research findings? We heard one piece of testimony that the research sits on shelves and gathers dust. From you, we heard that knowledge transfer is completely dysfunctional. What one asks for is an invidious comparison with other nations that manage these things better so we can see exactly where our deficiencies are. Can any of you elaborate on that? David Gardner: When I did my Nuffield, I visited the States, New Zealand, Australia and Japan—all countries that thought they did not have KT or KE well nailed down. The message I got right across the board was, “We used to do this better and we do not do it as well now”. My great criticism of the whole world of knowledge transfer and knowledge exchange is that our research facility in this country has become completely fragmented. It is scattered across a number of institutions. Some of those institutions have very strong themes in what they do. Some of them have quite a variety in their activities. The same is true of universities. Some of the universities have quite a strong theme in relation to their vet schools and so on. In others, the research programmes seem to be driven by whether they have a professor who is particularly good at pulling down grants or whatever. My great criticism is that nobody pulls all that together and puts it into best practice for the farming

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) community. If a really great piece of research is done in an institute somewhere, it might come up with one bullet point that is really useful for the farming industry and that could be applicable to every farming business in the country—but how does it get embedded in best practice? At the moment there is no formalised process to ensure that that happens. That is the role that, historically, the ADAS technical specialists used to fill when I started farming. In my view, we have never replaced that role. There is still a gap, and it is a big gap. Viscount Hanworth: In the 1930s, we were way ahead of the curve with the work that was happening in Rothamsted or wherever. Are you implying that all of that has now gone into abeyance or that it is no longer quite so relevant? David Gardner: I think that we are behind the curve. The data suggests that other industrialised countries have moved forward faster than we have during the last 20 or 30 years, and our research effort is unbalanced. There is too much emphasis on basic research and very little on applied research—but, in fairness, the agritech strategy is starting to address that. I see no formalised structure to make knowledge transfer/knowledge exchange happen in an organised way. That might be starting to change in terms of what the AHDB has aspirations to do, but it is still going through a period of change. The key role that we have lost is the technical specialist who pulls it all together, and who has the experience and judgment to work out what has value and how it gets embedded into best practice. I just do not think that that works effectively. Viscount Hanworth: You are saying that that occurred in the ’80s and ’90s. Is that when we went into retreat? The Chairman: Can we give Eirwen a chance to contribute? Eirwen Williams: I think the position in Wales is slightly different, because through the Farming Connect programme we have that ability. The remit of the knowledge exchange hub that we are establishing with IBERS will not just be to look at the research of IBERS but to look more widely, across the world, for research, and to translate it. It is a new concept— we are launching it on 28 January—but ask me in a year’s time if it has been successful. We need to prove that we are able to translate information to farmers and make it practical for them. Sir Peter Kendall: David touched on what AHDB is doing. For a while, to a large extent, we have been copying what is going on in Scotland with monitor farms. This is not just by sector but is starting to be cross-sector as well; experts come on farm to talk through exactly the issues that David was talking about. We are well aware that we are not going to recreate

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) the ADAS of the 1970s and early ’80s. The day of Government paying for extension services has gone. We have to look at doing it in a really smart way. The starting point is to get—I am using the word again—benchmarking. People need to understand that there is scope to improve. They can see that their competitors are doing better. Too often, I am in a room where people are telling me, “Don’t tell me how to grow grass”, or, “Don’t tell me I can do this better”. We need to be of a mindset such that we know that the Danes, the Dutch, the Germans or the French are doing something better than we are, and we want to be as good as them. That stimulates the inquiring mind to be part of a monitor farm. We have had a great uptake. The good thing about monitor farms is that people are sharing all their costs, all their information, and then getting experts to address the problems that farmers want to talk about. To pick up again on what David said, the disconnect between the blue-sky academic research and what is making a difference on my farm is critical. It has to be relevant, and, as well as the monitor farms, one of the things the AHDB needs to deliver is making sure that the work that is being done is relevant to challenges on the farm and not something that looks good in an academic paper. It must address the needs of farmers today. The Chairman: I am sure you would welcome the inclusion of impact assessments in the research excellence frameworks that are replacing RE. We must keep moving on. Lord Selkirk has to go soon, so perhaps we could give him the chance to ask about public policy. Then we will finish with Lord Curry. Q36 Lord Selkirk of Douglas: My interests are stated in the original document. I am chairman of a small family company that has a farm and small pieces of land in Scotland. Can I ask about public policy? We are aware of the very large amount of regulation that already takes place. What is the role of public policy in encompassing the CAP and in bolstering agricultural resilience? Has the increased reliance on direct payments as the main source of support had a big impact on the skills that farmers require? Has there been a substantial impact from that shift on agricultural resilience? That is the first half of my questions. Perhaps it is enough to start with. Sir Peter Kendall: I must be careful because I consider myself as working for farmers, not representing farmers. Policy is an area where you need to involve the NFU in a strong advocacy role. The single farm payment is the bedrock of resilience for most farming businesses. Today, with prices where they are, that single farm payment is massively important for the ability to take your foot off the accelerator, and step back from flat markets. Is there scope in the future to use the single farm payment to stimulate interest,

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) training or conditions around risk management? Phil Hogan has set up a new group, which I think meets today for the first time, looking at the role of agricultural markets, and it could consider whether a future CAP nudges us to take more risk management control ourselves. In the last round of CAP, the main conditionality around the single farm payment was greening. Could we move more in the direction of the United States, so that insurance schemes and risk management become part of that? I am absolutely sure that is part of the debate that will be going on in a meeting room in Brussels today as they plan their work programme. This Committee needs to discuss that with representative bodies such as the NFU to say how it might work. I am absolutely convinced, with the volatility that we have just seen, that, in nudging and enthusing farmers to take more responsibility for market volatility, there is a role for public policy. Lord Selkirk of Douglas: You have already answered part of the second half of the questions I wished to ask, but can I just put them to you very quickly from the point of view of achieving clarity? Do you see a co-ordinated EU approach as necessary to ensure viability and resilience, and should public policy be focused on improving resilience through both Pillar 1 and Pillar 2? Sir Peter Kendall: Again, I am in really difficult territory here because I am old world— sad—but I am on record making a number of comments about the common agricultural policy, so I shall not be saying anything new if I allude to some of those. There is a strong need for a common agricultural policy. What that looks like is about the ground rules on which farmers compete equally across the European Union. Pillar 2 is often used to drive different levels of environmental enhancement or particular environmental protection, and to drive skills or particular developments in different sectors of agriculture. The commonality of Pillar 1, a uniformity that allows farmers to compete on that ghastly “level playing field”, is important, rather than having big distortions. Why? Because I am sure we are all going to get drawn into the Brexit debate during the next few months. That market of 550 million people is absolutely fundamental to British agriculture. That is where the bulk of our trade goes. Viscount Ullswater: You sparked an interest in what you said about Pillar 1 and what the basic farm payment might be used for. In some of the evidence that we have received, the concept of having insurance in the American style probably would not be taken up by the insurance industry itself—or it would be difficult to get it taken up by the insurance industry.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) Do you see a use for CAP money either to fund that insurance scheme or at least to support it to get it going, for crop insurance, animal price insurance or whatever? Sir Peter Kendall: I have had a number of conversations with the Commission, which thinks that the United States model is not perfect either compared with our current system. I do not think that the commercial market would be able to provide the sort of service we are looking at. That is exactly why Commissioner Hogan is going to have meetings through the course of this year, to look at how the divide between commercial insurance and crop insurance may be stimulated through the use of funds already available through the agricultural budget and whether it might drive farmers in that direction. It is too early for me to pass comment or judgment on that, but I know it is the sort of work that the Commission is trying to have undertaken so that we can learn what the options are— because, as I said right at the start, we are in a completely new world without quotas and market management. The stimulus that we had from high prices showed what we can do. We have to think differently about how we manage risk as farmers. The Chairman: It is very timely because we have the Commission coming next week to speak to us. Can we move finally to Lord Curry, please? Q37 Lord Curry of Kirkharle: Peter, mainly I want to talk about levy-funded bodies, but clearly you have levy-funded bodies in Wales as well, so if you want to respond, Eirwen, that would be good. I was encouraged, Peter, by the number of people you say are now attending workshops and encouraging people to share information and data. What I find frustrating is that we have not moved fast enough by a long chalk. If we are to encourage resilience in farming businesses, understanding the costs of production and how you relate to and compare with your peers within the sector is a fundamental issue. When I chaired the Meat and Livestock Commission in the 1990s—from 1993 to 2001, as you know—I was talking then to farmers about benchmarking. It was perfectly clear then, and still is, that the variation between professional farms, those that take their business management seriously, and those that do not, is huge. The difference between the top quartile and the worst, in terms of costs of production and general efficiency, is still vast. It was then and still is. We may not like the term “benchmarking”, Peter, but we have to find an equivalent that encourages people to look seriously at the management of their businesses. As regards market mechanisms and contracts, about 10% of milk producers have a fixed-price contract. We regard these tools as essential to encourage farmers to be more professional in the way they manage their businesses and build resilience, but we are not moving fast enough. What

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) is the role of the AHDB and the levy bodies in driving the essential new business techniques that we need? Eirwen Williams: Speaking on behalf of knowledge transfer activities in Wales, we have moved from “benchmarking” to what is called “Measure to Manage”. We are coming from the same point of view as you, that we need a different approach altogether. There have been other benchmarking schemes in the past, such as Milkbench and Prime Numbers with HCC, which did not work. We are starting afresh because it is all about getting engagement from farmers so that they realise what is happening. The reason why we managed to get the 36 groups that we have already is local knowledge. We have a team of development officers across Wales who work in a particular region. They know the farmers in that region and they are able, first of all, to persuade them to come. Obviously, we do not need to work with the top 25%, who are keen already and may already be doing benchmarking. We are trying to target and engage the middle band of people. Once we have engaged them, we will be able to work with them, but you are right in what you say; it is taking a long time. Sir Peter Kendall: Lord Curry, with his experience of the MLC knows exactly what the challenges are around levy boards. The situation is difficult. Many farmers spend their time just managing the day to day. Faced with the appalling weather we have seen in recent months, as well as low prices and paying the bills, trying to get them to raise their gaze to planning the future, to thinking about where they sit vis-à-vis their competitors, is really difficult. If I am going to be challenging—to get to your point, Lord Curry, about what needs to happen—we need to change our mindset and our ambition as an industry. We have exciting opportunities in the UK. It might sound perverse of me to say that as we sit here talking about volatility, but the population of the UK is due to go from 63 million to 70 million towards the end of the next decade. Do we want that market for ourselves or are we going to let the Irish, the French or the Danes take that potential? Do we, as an industry, think that we want to be the best and we are determined to do that, or are we going to say that we want consumers to pay what is needed for us to make a profit? For the industry to move its thinking in that way is a big challenge. I know from visits to other countries in northern Europe that when you are a big exporter, your mindset is different from what it is when you have a big domestic market. If we are going to drive that change in the mindset and the role of levy boards, it is important that, as an industry, we do not think that we deserve a market but that we earn it and are ambitious to get the growing market as well. It is a difficult one. People point to me as a large arable farmer in East Anglia and say, “That’s

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) easy for you. You don’t know what it’s like to be in a remote part of the country”. Using technology and the ability to have smart communications, how do we make sure we change that mindset? That is the biggest challenge. There is an accusation or inference, Don—sorry, Lord Curry—that we need to adapt. The AHDB needs to be more fleet of foot, more joined-up in our working. That is something we are determined to drive through. Lord Curry of Kirkharle: I have one quick supplementary. Peter, you mentioned earlier that the single farm payment is probably the biggest single resilience factor at the moment in assisting farmers when commodity prices are low. Is it also potentially a deterrent to farmers becoming more professional in managing their businesses—in other words, a bit of a cushion? Is it deterring more innovative solutions? Sir Peter Kendall: You would not want to see me saying that in Farmers Weekly. I can see that. I know at the moment how important it is to my business. I consider myself to be reasonably progressive. The single farm payment is absolutely fundamental when prices are as low as they are. I have always argued that, over time, we will see the single farm payment reduced, and it is becoming less and less significant as a percentage of returns, particularly when we had prices at higher levels. It will, over time, drive people to innovation. What I do not know is when the switchover point occurs between having the single farm payment and becoming innovative and more resilient. Eirwen Williams: I agree that the single farm payment is absolutely crucial. It does not matter how much knowledge transfer you do, I do not think you would be able to come up with the difference in the amount that the single farm payment contributes to farming families. It is very important to keep that. With knowledge transfer, with the AHDB or with us as Farming Connect, we, as organisations, need to be innovative as well. We cannot expect farmers to be innovative if we are not innovative. We need to come up with new ideas all the time, new ways of communicating with farmers, new ways of working with farmers, delivering new ideas so that we are capturing their imagination and working with them. You might not like what I am saying, but as an independent organisation—we do not take levy money from farmers—and a not-for-profit organisation, we honestly believe in the future of farming and are able to engage with farmers. Perhaps one of the challenges for the AHDB is that because levies are taken from farmers they do not engage so well in some activities. In Wales we see the AHDB and HCC, as far as red meat is concerned, as strategic partners who feed into us the key messages they want to get out to the industry.

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Agriculture and Horticulture Development Board, Menter a Busnes, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37) David Gardner: Can I just make a comment about public policy? This is a little bee in my bonnet. It is not a comment directed specifically at the farming community; it relates to society as a whole. I believe that all of us have a personal responsibility to keep our skills relevant to change, and to adapt over a period of time. I see that as a weakness throughout society. It is not so much about the skills or knowledge; it is about attitude. We do not leave school at 16 and continue doing the same thing until we retire. The world around us changes so we have to change and adapt. We have to change our skills. I do not think that it is for someone else to do that for us. We have to take personal responsibility, and I do not see that widely throughout society. In public policy, Government are in a position to influence that without telling people that that is what they do. That process is quite subtle and it should go right back to schooling; society as a whole should develop a nation of people who are open to change, flexible, willing to retrain and reskill, and who constantly consider what skills they have to make themselves relevant to the modern world and the world that will exist tomorrow. Those issues, in my view, are as relevant to the farming community as they are to society as a whole, but I do not see anything being done to shape those attitudes. The Chairman: The phrase is “lifelong learning”, is it not? I am very familiar with it, certainly from an educational background, but maybe it is not as widely understood as it could be. That is an appropriate point to draw the session to a close, unless there is any pressing last question. We have run a bit over time, but I am very grateful for all your input. There may be one or two issues, particularly from our specialist advisers, which perhaps we could put to you by email. If you would be kind enough to respond, that would be very helpful. Thank you very much for your time. David Gardner: Could I conclude by saying that, on 4 and 5 February, St. George’s House at Windsor Castle is running a consultation on business skills and knowledge transfer in agriculture? If any of you were interested in attending, I am sure that I could facilitate an invitation. The Chairman: Thank you very much.

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All-Party Parliamentary Group on Agroecology for Sustainable Food and Farming — Written Evidence

All-Party Parliamentary Group on Agroecology for Sustainable Food and Farming — Written Evidence Agriculture and food production face unprecedented challenges in the coming years from the increasing complexity of food supply chains, climate change and the global movement of pests and diseases. Resilience could and should be seen in more broad terms than just financial. The APPG on Agroecology for Sustainable Food and Farming believe that environmental resilience is as important as financial resilience - climate and weather shocks are likely to cause as much harm, if not more than market volatility. If agricultural systems cannot survive these environmental shocks, then their ability to survive economic shocks will be moot. Environmental resilience can act as a buffer against price volatility - by happy coincidence the types of system that are most resilient ecologically tend to be those that reduce the reliance on inputs, diversify outputs and rely on natural cycles of energy, water and nutrients on farms. These types of system will tend to spend less on inputs which are subject to price volatility, and the diversification of outputs means that a fall in the price of one agricultural commodity will have less overall effect on the farm business. Rather than focus solely on financial instruments and insurance schemes to deal with market volatility or environmental crises, a more long-term view of agriculture, based on agrocological principles, would attempt to reduce or remove the root causes of these problems, for example using farming methods to reduce flood risk or encouraging the creation of fair and diverse markets for food, in the place of complex global commodity chains. To achieve resilient agriculture requires policies covering the long term environmental and economic sustainability of farming, animal welfare that include provisions for a healthy, affordable and balanced diet that limits or reduce systems that currently lead to biodiversity losses, air and water pollution and degradation of soils. The APPG Agroecology supports 

the development of strong local markets for farm produce,

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restoring biodiversity in the wider countryside.

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high standards of animal welfare.

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All-Party Parliamentary Group on Agroecology for Sustainable Food and Farming — Written Evidence 

restoring soils

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replace monocultures and intensive livestock with mixed farming

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minimise impact on climate change

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maximise mitigation of climate

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linking public health to agricultural policies

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regenerating the rural economy by supporting local food production and employment

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supporting the establishment new farm and food businesses especially for new entrants.

We also need to recognise the need to introduce for a zero waste policy, ensuring the recovery and treatments of all organic wastes (by aerobic or anaerobic treatments) so they can be returned to the soil to increases its capacity to store of carbon and its ability to store and absorb moisture to make the soil more resilient during periods of drought. In addition a soils with higher organic matter are generally easier to cultivate and therefore operations take less energy. Case studies from agroecology Use of beetle banks to control pests The introduction of beetle banks (particularly common with cereal growers) can benefit agricultural holdings by increasing biodiversity; providing nesting and foraging habitats for insects, mammals and birds, and pest control benefits (providing over-wintering habitats for predatory insects and spiders). Funding is available in the UK through the Countryside Stewardship scheme. The benefits of reducing pest problems can balance up the disadvantage of loss of land. There is an additional benefit of creating a reserve of permanent carbon, helping offset carbon footprint. Farmer-led flooding management The Pontbren Project is an innovative approach to using woodland management and tree planting to improve the efficiency of upland livestock farming, led by a group of neighbouring farmers in mid-Wales. They went on to develop new on-farm uses for woodland products, and when it became clear that tree planting had not just improved farm businesses and wildlife habitats, but had also reduced water run-off during heavy rain, they invited scientists to investigate. Supported by government funding, this internationally important research has revealed why strategically located belts of trees are so effective at reducing the amount of

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All-Party Parliamentary Group on Agroecology for Sustainable Food and Farming — Written Evidence water running off improved upland grasslands. The scientific data from Pontbren is now being used to study the effects of land use on bigger catchments prone to flooding. 4 March 2016

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73)

Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73)

WEDNESDAY 3 FEBRUARY 2016 11 am Witnesses: Oliver McEntyre, Allan Wilkinson, Lindsay Sinclair and Dr Harald Jahn

Members present Baroness Scott of Needham Market (Chairman) Lord Bowness Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Krebs Lord Rooker Lord Selkirk of Douglas Baroness Sheehan Lord Trees Viscount Ullswater Baroness Wilcox ________________ Examination of Witnesses Oliver McEntyre, National Agriculture Strategy Director, Barclays Agriculture, Allan Wilkinson, Head of Agriculture and Food, HSBC, Lindsay Sinclair, Group Chief Executive, NFU Mutual, and Dr Harald Jahn, Head of Division, Natural Resources and Agro-Industry, European Investment Bank, examined

Q64 The Chairman: Good morning. Thank you all very much indeed for submitting written evidence, and particularly for giving up your time this morning. I know that you are all very busy so the Committee really appreciates your input. As you know, we are carrying out an extensive piece of work looking at price volatility in agriculture and the impact on farmers individually and on the sector. Clearly your input is important to us as we begin to think about financial instruments. To deal with the housekeeping, this is a formal evidence-taking session of the Committee. A note will be taken and put on the public record in printed form and on the parliamentary 41 of 373

Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) website. We will send you a copy of the transcript, which you can review in case there are any minor errors. The session is on the record. It is being webcast live and will be accessible on the parliamentary website in due course. You have all had a copy of the interests of various members of the Committee. I remind my colleagues that if they have interests that are specifically relevant to this inquiry they should declare them the first time they speak. My colleagues and I have a number of questions that we hope will lead to a useful discussion for all of us. Some of the questions will be aimed more at one of you than others, but if you feel you have a contribution to make to any question, please feel free to contribute. I want to start with a general introductory question. I will ask each of you to say a quick word or two about your organisation for the record. Would you also begin with an overview of your thoughts about whether volatility is becoming worse and whether the impact on farmers is becoming worse, because they are not quite the same thing? It will be interesting to hear what you feel about the situation overall. Allan Wilkinson: My name is Allan Wilkinson. I am head of food and agriculture for HSBC. I am the sixth head of agriculture in the more than 50 years that we have had a team. We have a dedicated team that deals specifically with farmers, and we have done so for at least the 28 years that I have been in the business. I am a tenant dairy farmer’s son, and I think we focus quite closely on the fortunes of the sector, both positive and less positive, over recent times. To answer your question specifically, there is certainly increasing volatility. At the moment most commodities are in the lower part of the cycle, but we must remember that commodities have also been high in recent times and therefore we need to take a view of the cycle rather than necessarily just a point at the moment. I will save other comments for later, if that is okay. Oliver McEntyre: I am Oliver McEntyre, national agricultural strategy director for Barclays. I have a similar story to that of Allan. We have banked agriculture for over 250 years. We are very committed to the sector and we have a team of nearly 200 staff dedicated purely to the agricultural department at Barclays. To me, volatility in agriculture is nothing new. I grew up on a pig farm in Lancashire so I know all about volatility and fluctuating markets. We now no longer have a pig farm in Lancashire, so I know more about it than some perhaps. We are seeing two ends of the spectrum. We have seen record milk prices and record lamb and beef prices. For me, volatility has slumped; we are in a lull at the moment. It is like a

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) tightening screw on the industry. The longer it stays down, the harder and tighter the finances become. Lindsay Sinclair: My name is Lindsay Sinclair. I am the group chief executive of NFU Mutual. To add to the profile you have already received, NFU Mutual is the UK’s leading rural insurer, with about 1 million policyholders, and more than half of those are in farming. I am also a trustee of the NFU Mutual Charitable Trust, which provides financial assistance to address hardship in the farming community, to improve the public’s knowledge of farming and to support young farmers. We are a separate organisation from the National Farmers Union, but we work closely together in a very strong partnership. On the question about volatility, from all the signs, we certainly see volatility continuing in the short term. As a mutual insurer insuring the majority of UK farmers, that concerns us. We see the risk as one of reducing confidence in the sector, potentially reducing investment in the sector, hampering investment decisions and affecting the financial viability of some farms. That does not affect only agriculture; it obviously has an effect on the rural economy more broadly. Dr Harald Jahn: My name is Harald Jahn from the European Investment Bank. I head the natural resources and agro-industry division. We are the bank of the European Union located in Luxembourg. The division operates globally so we are not only in Europe. We are in agro-food and biomass in general, financing for more than 40 years. Our annual lending to the sector, including forestry and afforestation for climate action, is between €4 billion and €5 billion in long-term lending, of which a third is helping mainly member states to implement rural development programmes with their co-financing needs—their own shares—so that they can access rural development support from the EU. One third is direct lending to private sector companies for research, development and expansion of production, and one third is to supply promotional banks or commercial banks with long-term liquidity, in addition to the short-term liquidity they usually have, to invest in sectors according to the bank’s policy objectives. We are an independent body within the EU. Our governors are the Ministers of Finance. We do not have our own statistics on agriculture and food, but we operate globally; for example, in China we have helped to finance 400,000 hectares of afforestation in the last three or four years for global climate trends. Looking to global trends, we have had price volatility over hundreds of years because it is weather-related, but we have—this is my observation—one difference. We have further specialisation in agriculture due to scaling up,

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) which makes the individual more exposed to single-sector market changes. Secondly, the old owner-operator model is changing, specifically because the number of farmers on the landrelated production side is growing quickly because of technology innovations. That is mainly on rented land, so they are tenants. The system that you have much experience of in the UK is extremely important, for example, in eastern Europe, in Ukraine, there is no land salepurchase market. The question for such operators who have no collateral is how to invest and get collateral. Commodity markets have become more volatile, but in my experience of horticulture there has never been support or volatility for radishes or salad. It is the same for a big commodity in Europe—potatoes. We are mainly talking about very few commodities. The second question is: how can we somehow get agricultural cash flows understood by banks; what form of risk should a farmer or the food production value chain internalise, normally between three or four partners, and what should be externalised; and how can that work? What can be outsourced at what price to make the tenant farmer or tenant-related farming less vulnerable and more sustainable in the investment in and production of good and healthy food for the population? The Chairman: Thank you very much. One question that emerges from that, as the structure of agriculture is very different in every country, is to what extent the banking sectors in other European countries are able to represent that. Clearly the NFU is operating in the UK, but the two banks are international banks. What are your reflections on how the finance sector works in other countries? Allan Wilkinson: At HSBC, in the team I work in, we are especially focused on the UK. We do not have that type of franchise in other European countries, so I am sorry that I cannot answer the question specifically. Certainly here, we have a very deep working relationship with our farming customers and indeed the farming industry. Some points have been made about funding tenants, for instance, when they receive the same commodity prices as the other parts of the industry; some of those farmers are the best farmers we have, and they have been highly successful. I realise that they have limitations, but as regards viability and the ability to progress, some of those businesses are beacons for the whole industry. Oliver McEntyre: We have a very similar answer. We are a solely UK-focused team. That is the focus of my role and job in Barclays. As far as I am aware, we do not have dedicated agriculture teams dotted elsewhere around Europe. I agree with Allan that, although the

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) tenanted sector presents a challenge because of the nature of the security behind it, some of the tenanted sector are among the best farmers the UK has. The Chairman: Before I bring in my colleagues, could you say a few words about data? Clearly this is a very data-rich area. Is there a culture of sharing data about what is happening in agriculture around the world and what is happening to farms, or does commercial confidentiality mean that there is a culture of holding the data to yourselves? Allan Wilkinson: It is a fascinating question. We spend a lot of time understanding our individual businesses. I cannot emphasise too much the variation between individual businesses, even when they might appear quite similar from the roadside. Obviously data is especially sensitive. Although we try to understand our individual customers, and we might make internal assessments of how the portfolio or the sector is doing, I am not aware of any initiative to share that data on a broader basis, principally because of its confidential nature. The industry has an element of data, certainly in the UK. Could that data be better? That is an interesting question, but there is plenty of information to start to understand some of the range in variation, and the ability and capability of what might be possible. You are right to say—I am not just agreeing with you—that we are now in a global marketplace. An understanding of that global marketplace and what “best” looks like in different countries, and understanding the nature of individual farm businesses and industries in, say, New Zealand or Australia, is really important. We need to do more as a whole sector to try to understand that. That is certainly one thing that I have been trying to do in our business. The Chairman: Would that be about sharing data, or does it need to be generated from new? Allan Wilkinson: It might be sharing data, but it might also be understanding best practice and compiling data on the back of that—understanding how people cope with volatility. As has already been said this morning, we have had volatility in the sector for a very long time, partly because of weather, so it will be important going forward to understand how other, probably more extreme, agricultures manage their fortunes, aspirations and levels of confidence, which are all key parts of what we are talking about. Oliver McEntyre: There are two batches of data. Obviously we have our internal data, and competition law would prevent us sharing that among the banking institutions. There is an awful lot of data out there in the agricultural sector; pricing mechanisms and livestock options are very public. Farm-gate prices are common knowledge, no matter what variances

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) there are between different contracts. We have a lot to learn, not just from around the world but actually from the better end of our farmers in the UK—our top quartile of farmers—to push data through the industry. We try, as I know Allan does, to get involved in events such as business-to-business shows and writing in the farming press, just trying to get people to look at the benchmarking data and how they can improve their business. It can be quite a solitary way of life. If you do not leave the farm, or only leave it once a week, it is very hard to catch up with people and get that interface and information transfer. It is not for want of trying at times. Lindsay Sinclair: As an insurer, we collect a lot of data from our farming customers relevant to the risks that we are insuring. We insure between 65% and 75% of the farming market so we bring together a lot of data. We do not share data on a personal level. The Chairman: No, of course not. Lindsay Sinclair: We aggregate data for the ABI or for the Health and Safety Executive. A lot of the data we receive is accessed through our partner organisation, the NFU, to understand the pressures on different sectors of farming and at a high level the impacts of what is happening in other parts of the world. Q65 Lord Krebs: I would like to ask a few questions to do with EU finance and financial instruments, probably directed primarily at Dr Jahn. Commissioner Hogan has repeatedly emphasised the role that financial instruments can play in supporting farmers. Could you describe for us, Dr Jahn, what the financial instruments are and if I were a farmer how I would access them? Dr Harald Jahn: Thank you for the question. The whole thing is very easy. There is nothing new, but we have to give more possibilities for mixed grants with credits. That is the entire idea of financial instruments. Financial instruments are suitable only for financially viable projects. There is a mix between grant and investment for financially viable projects. The idea from the Commission and DG AGRI is to reduce grant financing in the long term and for the payback from the financial instruments to be re-employed in the same sector, for funding needs in the sector. The advantage of that approach for the farmer or rural business is that, for example, with a financial instrument they can get funding upfront without having to pre-finance first and get the project grant finance afterwards. The time axis is one component. Compared with commercial bank finance, the loan from financial instruments can be provided on preferential terms and conditions, inter alia the lower interest rates that the EIB

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) can generate on the international capital markets. There are longer repayment periods—I can come to that later—and perhaps less collateral required for tenant farmers. We are working on guarantee instruments, which can also be used to leverage further investment funding from the private banking sector. The advantage for the public purse, and indeed to the wider overall economy, is that the money is used more efficiently. It is paid back and then can be used over and over again in the same region for other investments, giving benefits to more farmers and businesses. I can give you some examples later if you want, but succession financing, specifically for the young, with modernisation and innovation, as we heard, is a question of collateral. The financial sector—the banks—can be hesitant at times when markets are a little bit down, so DG AGRI asked us to think about what instruments are possible in the market and to come up with some guarantee formulae backed by DG AGRI, involving commercial banks, helping them to keep or grow their lending portfolio in the rural sector and for farmers. Lord Krebs: What about the other part of my question? If I were a farmer, how would I access those instruments? Dr Harald Jahn: First, some of the instruments already exist; they were introduced under the COSME project for SMEs. The other point is that we would like to bank on our experience in SME financing for farmers. Direct access would be only if the investment was of a certain size or a specific dimension. The main point is to have access to the programmes being implemented by national Governments, because in some countries budgets are so tight that co-financing is not available and the money cannot come from Brussels for needed investments in the agricultural and rural economy. The other way would be to talk to partner banks, their local banks, to see if they are aware of guarantee mechanisms or risksharing facilities where farmers can participate. Q66 Lord Krebs: You referred to the joint initiative with DG AGRI. Commissioner Hogan, in an exchange with James Nicholson MEP, said that the EIB was making “slow progress” in providing financial products for agriculture. What is your comment on that? Dr Harald Jahn: Slow is always relative. The main difference has to be spelt out more clearly. I was part of the negotiation committee for the MoU with DG AGRI when we tried to bring first principles and the first clear ideas of what the need would be; the EIB has experience with DG REGIO and DG RTD that can also be used for investments in agriculture and agro-food.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) It should be clear that the EIB is the bank of the EU and has to comply with sound banking principles, and it differs from an insurance company. Insurance companies themselves have to comply with sound principles, but the different know-how profiles and the riskassessment mechanisms for a bank and an insurance company have to be expressed more clearly in the MoU to manage expectations at all political levels and to talk mutually together, not mixing experience and profiles, in order to have volatility-related products in the short, medium and long term. Lord Krebs: Are you refuting the assertion that progress is slow? Dr Harald Jahn: I am not disputing. I am just saying that we work from the knowledge and experience of a bank. Lord Krebs: I have one more question. If you are prepared to comment, what is your view of the United Kingdom’s record? Do you think that the Department for Environment, Food and Rural Affairs is taking up those opportunities to encourage our farmers to take advantage of financial instruments? Dr Harald Jahn: The UK, according to my knowledge, has four different managing authorities for the Rural Development Programme. The four are asked to come up with operational programmes, to identify certain things for implementation and send them to DG AGRI for discussion and approval. That is not the job of the EIB. The different managing authorities and the Agriculture Minister can in parallel discuss with the EIB co-financing possibilities and the other mechanism, which is the guarantee. Everybody is welcome to bring examples. We have tried to work with commercial banks in agriculture, because we do not have the data ourselves to see risk profiles, absorption capacity or volumes, for example, for young farmers’ finance or succession financing. The EIB has been approached by your relevant ministry for support and information on the different instruments. Discussion is ongoing, so I will leave it to the negotiators to disclose the progress. Lord Cunningham of Felling: Dr Jahn, is the British Government’s approach and success, or otherwise, in these developments better or worse than other comparable member states of the European Union? Dr Harald Jahn: It is not up to me to judge from the banking perspective. We can only offer products and services to all our member states on equal terms. Some countries were very interested—because they needed to be due to budgetary constraints in the last couple of years—in talking to us to get co-financing. We had to look at what was possible under the

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) EIB’s policy objectives. At the time we had only two policy objectives: financing SMEs and climate action, so we concentrated first on afforestation and erosion controls in some of the central European member states. They are things that are in compliance with climate action and funding SMEs on environmental issues. In the last four or five years, commercial banks have requested longer-term funding credit lines for the agricultural and food sectors, including forestry. We should not forget that forestry is part of rural development in a lot of countries where the paper industry is strong. It grew from €2 billion to €5 billion, so we have doubled lending to the sector in the last five years. Lord Cunningham of Felling: How much of it goes to the UK? Dr Harald Jahn: In that specific sector, a couple of hundred million. The Chairman: That is very helpful; thank you very much. Q67 Lord Trees: My questions on private finance relate particularly to the bankers and NFU Mutual. You all offer a variety of financial products to farmers. It has been suggested that data may be a limitation on making those products available. Can you outline for us the products you offer? What is the take-up? What are the barriers to take-up, particularly the data one? Finally, on an issue that has been touched on already, are tenant farmers and contract farmers at a disadvantage in accessing those products? Allan Wilkinson: Over the time that I have been in the business—28 years, as I said—most of our customers have a current account and have access to an overdraft facility and term lending, if needed. They have internet banking in order to conduct their transactions. Where necessary we are able to hedge things like the single farm payment. When we sit down with a customer or a prospective customer, we do not differentiate farming types or farming classes, be they landowners, tenants or share farmers. When we sit down and look at the business, we are trying to make sure that the business is viable. In the case of a tenant—and I can think of several examples where this has happened throughout my career—we have sat down and worked out whether it was feasible beforehand, looking at budgets and using our forward planning booklet, which we have published for over 40 years. If need be, and we have done this on several occasions, we have involved people like the landlord to help assist the establishment of the particular enterprise. Over my time and in my experience, certainly by trying to understand what the customer wants, there have been very few instances where we have been unable to support what you would describe as a plausible enterprise in the first instance. There is a whole range of situations. I am thinking of one particular tenant where the landlords helped with some of

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) the capital projects such as buildings, drainage and the like, and we have advanced money to the tenant using an agricultural charge that came out in the agricultural credit SAP 1928 as a piece of security to help that tenant, first, to establish himself and, secondly, to move forward. We use that piece of security fairly well now and it really has its purpose. Could I make one point on the previous comments that we have heard about longer-term funding? In my time in the business, we had an organisation called the Agricultural Credit Corporation, which assisted sometimes smaller but certainly tenant farmers become established where there was a guarantee in place. From memory, I think that organisation was wound down in the early 1990s; I am sorry that I cannot be more specific. Certainly that proved effective at that point. Now, with probably more volatility and more challenge around, I do not think it has been any more difficult to help the well laid-out business plan that is plausible and able to move forward. Oliver McEntyre: I will try not to repeat what Allan has said. Banking to the agricultural sector tends to be quite simple by nature. It is loan, overdraft, asset finance and current account, basically. Of the Barclays agricultural book, slightly over half borrow; the remainder have no borrowing requirement or do not at the minute. Some of the challenges in agricultural banking and why it is tricky are because of the very high capital cost compared with the quite thin margins, especially at the moment with possibly no margins. Even in the tenanted sector, you are probably talking about a quarter of a million pounds to set up a 100-cow dairy farm, and that is an awful lot of cash to find. When we are looking at young people and new entrants, and trying to revitalise the industry, a real challenge for us at times—I am sure it is the same for Allan—is when we are looking at term debt. If we have only a five-year tenancy or an eight-year tenancy, that is all we can look to lend money over. We will lend money into agriculture for 25 years, and even up to 30 in some instances, but if we have only an eight-year tenancy it is not very responsible to lend someone money over 15 years because, after eight years, that business could cease to exist. Allan Wilkinson: That is where you go to the landlord and say, “Let us have a really plausible project”. Oliver McEntyre: You are right there, Allan. To finish the answer, the level and depth of information we get with the lending request never ceases to surprise me. Because some of our smaller tenant farmers have maybe had to go through a tenancy application process, they will have a great business plan that is realistic, based on their current track record or

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) their past experience, and yet, occasionally, with some of our larger farmers, we get a telephone call saying, “I need £X million to buy next door”, and then the conversation ends, I am afraid. Viscount Hanworth: What worries most of us in banking is that, increasingly, the friendly and knowledgeable bank manager has been replaced by somebody with a checklist and that decisions to grant financial support are made increasingly on an algorithmic and statistical basis. You have depicted yourselves as the former—the friendly bank managers. Do you feel pressure—it is not the right expression—to update your procedures and become more algorithmic to the detriment of your knowledge base and your engagement with individual farmers? Oliver McEntyre: Not at all, and I am sure Allan will agree in a minute. Everything is on a case-by-case basis. There is a double-checking system. We have our managers on the ground who do that initial appraisal of the lending application. At that stage they might push back and say, “We need another year’s cash flow”, or perhaps, “We actually need a cash flow or a business plan”. We might even refer them to some consultants or specialists within the industry to give them that little bit of help to hone their business knowledge and business skills. That will then go to a specialist agricultural credit team. We do not feel the need or the pressure to turn into some automated system. We are very proud of the fact that it is on a genuine case-by-case basis. Viscount Hanworth: Nobody is encouraging you to change your methodology. Oliver McEntyre: Not that I am aware. Viscount Hanworth: That is great. Allan Wilkinson: From HSBC’s point of view, absolutely far from it. We have grown the number of people that we have in the last five years dealing directly with farmers. Some of the points that Oliver has made are absolutely right: understanding the business; taking care of the customer; and making sure that we really do understand it and that our teams are well briefed. We try to make sure that they are as knowledgeable as possible. This is a real cornerstone of our business in the rural economy. If that is happening in my business, nobody has told me yet. Viscount Hanworth: Thank you; I am relieved to hear all that. The Chairman: Lord Bowness and Lord Selkirk have questions. Lord Bowness: I have a very quick question. You were talking about the problems of seven and eight-year tenancies. Does the Agricultural Holdings Act and the security not help?

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Oliver McEntyre: It does, but, unfortunately, now we have farm business tenancies. So, where we have AHA succession tenancies, that gives us a generational security of tenure, if you will. Where we are on more modern tenancies—the farm business tenancies—some of those can be as short as two or three years. If you are looking to term-out debt on a business loan, it is just not doable. You cannot lend money for 10 years when you only have tenure for three. Lord Selkirk of Douglas: Lord Chairman, I declare an interest in that I am the chairman of a company of directors with a very small farm, with one or two pockets of land. I have two questions. First, is the incidence of bankruptcies very rare overall, and, secondly, are more and more institutions buying up farm land and entering the farming market? Allan Wilkinson: As far as I am aware, the number of bankruptcies in the industry is low. It is not a figure I have to hand but I understand it is very low. With regard to your second question on institutions, we might have seen slightly more interest in the last three, four or five years, let us say, but over the last 25 years, particularly when I first started in the business, we had all the pension fund investment in agriculture. I suspect it is probably no different from the long-term run rate—from what we saw in the late 1970s and early 1980s. Lindsay Sinclair: If I can return to Lord Trees’s question, as the UK’s leading insurer, and having 65% to 75% of the farming and growers’ insurance market, day in and day out we are dealing with the risks that we underwrite from small hobby farms and medium-sized and large-sized farms across the full range of sectors in terms of livestock, arable and so on. So we do have a lot of data relevant to the risks that we are underwriting. In terms of those risks, clearly there is motor, business, commercial and personal, as well as, with NFU Mutual, we offer protection policies, pensions and investments. In response to the question about the friendly local manager, we operate as a mutual owned by our members through, I think, a unique service for the UK of about 320 officers around the countryside. We do effectively have a local manager who is in very close contact with the farming community, which supplements the data on a very personal basis locally. Those are relationships that extend back often for many generations and have built up a lot of knowledge about the particular circumstances in that area. Just to complete the answer, we do not make any distinction between owned, tenanted or managed farms in the way that we look at our business. Dr Harald Jahn: May I make one observation from my work on the algorithms and debt situation? I will talk about natural capital in general. Agriculture is composed of financing and

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) operating living and dead items. Living is plants and animals; dead is buildings and machinery. Agriculture as such is only slightly different from other SME lending. If you come to natural capital—forests—from what we have observed, I was surprised because these algorithms were baptised by their respective auditing companies and they cannot appreciate. So it was difficult to find the right model for afforestation. In education also, there are difficulties if you have long-term assets that are growing, living material. Some of the methods we were confronted with were also a surprise for me. There is perhaps a literacy need or a discussion need specifically if you want to have long-term natural resources financed with credit, using the same risk models, since these things have to be appreciated and not depreciated. The Chairman: Thank you. Before we move away from this section, Lord Rooker and Lord Curry have questions. Lord Rooker: Does price volatility extend to agricultural land prices? Oliver McEntyre: Not that we have seen so far. The land price graph tends to climb steadily; many expect it to plateau this year or in the next two or three years. Allan Wilkinson: I would concur with that. Lord Curry of Kirkharle: I have two brief supplementaries but perhaps I had better declare my interests. I farm in Northumberland, and Allan and I work together. We are both trustees of the Prince’s Countryside Fund. I am also on the board of Farming Futures. As far as the NFU Mutual is concerned, I was on the board for 12 years and chair for almost eight years. I am also a trustee of the NFU Mutual Charitable Trust, which Lindsay mentioned. I have two brief questions, largely to Allan and Oliver. I think I know the answer from Allan on this because he and I took part in a seminar here on the subject. Oliver, you mentioned FBTs. Would you prefer to see longer FBTs? Would it create a greater resilience for individual farm businesses if FBTs were longer? Oliver McEntyre: It would certainly make our life a lot easier to see longer FBTs, and you do see them. Some of the estates will offer longer term and some are very keen to push— The Chairman: Is the length of farm business tenancies set in law or is it a matter of practice? Oliver McEntyre: It can be anything from 12 months to 25 to 30 years. Lord Curry of Kirkharle: For many landowners short FBTs have been chosen because they want to retain some flexibility in decisions, but from the resilience point of view it is difficult for individual farmers. Oliver McEntyre: It is challenging at times.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Allan Wilkinson: For the record, yes, I agree with what Lord Curry has said, and I also suggest that the industry would be a lot better placed as well as ourselves, and certainly in the interests of customers, to make sure that there was a longer term in tenancies. Going back to the issue of FBTs, we have seen an increasingly short term to the average of FBTs. On the point about AHAs, which came in with the 1986 Act and were succeeded by the 1995 Act and farm business tenancies, by the very nature of the timescale concerned there are fewer of those around than there used to be, and that will be a declining number. The Chairman: Thank you. I am sorry; I missed Lord Bowness earlier on. Then we will move on. Lord Bowness: I am sorry; I did not pursue my question further because I thought I must just be totally out of date. Perhaps you could help because the point about security is quite important. There was a time when agricultural holdings were renewable; there was a right of security, surely, and you could only avoid that by giving a tenancy of less than a year—364 days. Allan Wilkinson: Yes; Gladstone v Bower. Lord Bowness: I do not remember that. Are you saying that the right of renewal has now gone with the business tenancies? Allan Wilkinson: No; I do not think it has gone. If the landlord and tenant have a strong professional working relationship and it is working for both sides, then, effectively, like a commercial lease, the arrangements for the tenancy on that farm can be renewed. On the point you are making about succession as a right under previous Acts, that aspect of it has gone. But, even so, in those particular cases—and I was subject to one of those—the succeeding next generation would have to prove their worth in terms of the ability to run the farm and other aspects that would satisfy the legislation in place. Lord Bowness: I have to say I was not really thinking about succession. I was actually thinking about the statutory right of renewal and not whether you negotiate an agreement and the landlord and tenant get on all right. Allan Wilkinson: As we have seen in recent times, my Lord, it has been an increasingly testing part of the whole agricultural landscape. For those tenants who cannot secure, because it is not a right—it is not set in statute—it is down to the ability of that negotiation, how they get on with the people and all the other things that I pointed out. Viscount Ullswater: Can I ask one very quick question? The Chairman: All right; very quickly. Then we must move on.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Viscount Ullswater: What is the difference between farm business tenancies and AHA tenancies with regard to inheritance tax? Allan Wilkinson: That is a really good question and it is an area of expertise that is probably not my strongest. From the point of view of the tenant, there is probably very little difference in that sense. In terms of the land ownership, there is probably significantly more difference, but I think we focus more on the viable farm and the farming tenant than necessarily the landowner in this case. The Chairman: Thank you. Baroness Sheehan? Q68 Baroness Sheehan: Good morning. I would like to explore the role of insurance. While I accept that there may be some on the panel who may have more views to exchange and share with us, I would nevertheless like to hear views from everybody on the panel. In certain other countries such as Canada and more recently the US, there has been a clear shift to insurance mechanisms supporting agriculture, in the place of direct support. What is your assessment of the success of insurance as a risk management tool? Do you offer such a product, and, if not, why not? Lindsay Sinclair: I will begin, if I may. NFU Mutual is a UK-only insurer, which means that, while we have some knowledge of a number of arrangements that exist in respect of multiperil crop insurance in the US, North America and Europe, this knowledge is fairly limited. We do understand, though, that they are typically public/private partnerships, with the Government either directly subsidising or being in some instances involved as a reinsurer. Having explored these arrangements at a very high level and spoken to farming bodies and farmers directly, we have not seen the demand from UK farming for similar crop covers, the issue cited usually being premium cost, and it is also worth noting that the UK does not see such high variation in yields as other countries. NFU Mutual offers some specific cover for high-value crops against hail, and similarly we understand this type of cover is provided privately overseas rather than via public/private partnerships, although again there are relatively few buyers of this coverage. Our annual premium income in this respect is about £1 million out of a total premium income of £1.3 billion. We have also developed a similar freeze cover for the UK sugar beet crop, where the sector as a whole has decided to buy some limited catastrophe coverage to deal with extreme freezing events such as we saw in 2010, but again the premium values are modest. They are less than £1 million against our total book of £1.3 billion. If there is a government appetite to explore a public/private solution in the UK, we have a specific knowledge that we could

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) bring to the table and we would be happy to be part of the discussion, but at this point in time our knowledge is at a very high level. Allan Wilkinson: From HSBC’s point of view, I would concur with what Lindsay said in the fact that we do not offer specific products at the moment, partly because we are based solely in the UK as a team, and we have not seen the demand for such yet. I am acutely conscious of the schemes that you talk about in other countries, and, indeed, in September, I spent some time in the US to try to understand how their system is in operation through the latest Farm Bill. I think it is too early to judge how that is working, but with the interest in the topic not just from today but as volatility continues, we will be very interested to see how matters develop in the US and other places. Dr Harald Jahn: From our experience, we were approached and looked into a similar product about 15 years ago together with our colleagues from the World Bank. It was the so-called weather index insurance fund for sub-Saharan Africa, where countries are exposed—60% to 80% of their export earnings on one crop: cotton, for example. The European Investment Bank considered at the time that our knowledge should concentrate on banking, but our colleagues from the World Bank, for your information, in sub-Saharan Africa have continued. The first examples of weather index insurance funds are also in central America and Africa, which is a different animal from the American and Canadian examples, which are much in compliance with WTO rules. There are two different drivers behind it.Baroness Sheehan: Could you outline the pros and cons of the use of publicly funded insurance schemes in the EU context? I think Spain is one, for example. Dr Harald Jahn: I have some half private knowledge but I do not have an overview, so we can revert to you if I talk to my colleagues. This is not our normal sector of activity. We might come back to you with some ideas that might not be founded on data because it is only on newspaper articles. I would rather ask you if I could come back to this question; thank you. Lindsay Sinclair: I am happy to say that we had a look at the question and therefore considered the pros and cons. I think the pros could potentially provide a safety net in the event of major disruptive occurrences. They could potentially provide support in a world where climate change is adding to agricultural instability and could focus support where it is needed most. On the cons side, it could distort commodity prices, is open to political influence and may encourage use of unsuitable farming practices and production. That would be our balanced take.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Lord Trees: With regard to banking, we have heard of a scheme—I cannot remember the name; colleagues will remind me—where farmers in a good year can deposit money with a fund, receive interest on it and then recover that to support income in a bad year. It sounds as if it is something that a private banking industry could provide. Do you provide anything like that? Allan Wilkinson: At the moment, no. It is something that we have discussed from time to time. We have not experienced any need for that yet; we would have to make sure that there was an understanding of when the money was drawn and that it was fair and equitable with everybody if it was in a pooled situation. But, no, we have not taken it any further than some fairly detailed discussions from time to time. Oliver McEntyre: There is no specific product for that, but I come from a very traditional farming background. A lot of the farmers who borrow tend to borrow on overdraft. When the farm-gate prices were very high, I wrote a couple of articles saying, “Perhaps that mechanism needs to be paying your overdraft back down and not fully utilising it”. It is an exceedingly powerful message to a lender if you borrow money when times are hard, make it back and pay it back. When you come knocking on the door again, we will have that faith that you can deliver on your management promises. Lord Trees: It is an inverse overdraft in a way. The Chairman: The issue was also about the tax treatment of it. Lord Rooker: Then you do not have the five-year tax arrangement as well; the money was not taxed as it was put in and taken out. The Chairman: That is right. Your question is next, Lord Curry. Lord Curry of Kirkharle: I would like to ask a quick question on data before I move on to risk management. Some of you will be aware that under the agri-tech strategy a new agrimetrics data centre is being established. While your data clearly are confidential and sensitive, I presume you would be willing to make that data available anonymously to a national data centre if that would be helpful. Allan Wilkinson: Certainly it would be something that we would consider. We have not considered it yet, but it would be something that we would consider and we would have to take that back. Lindsay Sinclair: We would certainly be happy to contribute data at an aggregate level. Q69 Lord Curry of Kirkharle: Under the common agricultural policy, as you know, there are two strands—two pillars—in the way that agriculture is supported: direct

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) payments through Pillar 1, and Pillar 2 through rural development funding under a range of other measures and schemes. In Britain, we tend to use it for our environmental schemes, et cetera. But within Pillar 2 there is the facility to use those funds to mitigate risk management, and insurance could be one of those tools. I am particularly keen to hear from Dr Jahn on whether these tools are being extensively used across Europe. You touched on this earlier, but could I press you a bit more in terms of the other member states that are using some of these risk management tools? You said there were early discussions taking place here, but we want to be helpful if there is an opportunity to explore these tools. Would you perhaps give us a little more information about what could be possible? Dr Harald Jahn: First, these are for the period 2014 to 2020, which is perhaps also a training period for after-2020 funding mechanisms of the common agricultural policy, but this is up to the politicians, the ministries and the different Governments to decide. Under Pillar 2 we have financial instruments, which is the subject in general. Together with DG Agriculture, we see that the ministries of finance and agriculture have not had a clear understanding of what this could be. Until now, there have been very few agriculture operational plans from the different member states or regions—because the regions are also responsible in some countries—that have ticked the box “We would like to work with financial instruments”. We have seen this together with our colleagues from DG AGRI. The current phase also involves awareness-raising and, with the first revision of their operational plans each regional member state makes, we try to say to the ministries of finance and agriculture that they should talk together to advance the ex ante assessment, which is a sort of gap analysis. Is a gap identified in the specific country or region that can justify the use of public money? This is for all EU funding now necessary for the financial instruments. We see now more interest in discussions. We had some questions from your country on what could be and what is needed. So it is a two-step approach, and in the context of the first revision of the operational plan for all countries one could anticipate the ex ante assessment of financial needs, which could include insurance mechanisms; it could include guarantee mechanisms. Therefore, it is said this is not dubious; it is very simple, but it was seen in some instances as too difficult for the specific administration having lived with 30 years with pure grant financing. After some years now of discussions in Brussels in the specific committees, I think it is clear that there is nothing mysterious about financial instruments. It is mixing co-financing—what commercial banks normally do—plus perhaps insurance in one or other form.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Summing up, there has been little interest so far. We are in infancy all over Europe in agriculture—different from others. The same might be true for RDI, which could be combined with money from others. The point is to have an overlap between agriculture and the agri-food industry, because these are clearly linked and sometimes there are artificial barriers that might be rethought, and we are working on this as well. Nobody has anything up and running yet (in terms of financial instruments for the 2014-2020 programming period). We will try to get it in the next year or two, and it would be helpful if other institutions offered some working groups with the Commission or with us, because we are a bank and for the insurance instruments we might need some support from experts with risk assessment capacity. Lord Curry of Kirkharle: So you would welcome some encouragement to continue to develop the thinking on this. Dr Harald Jahn: As we have said in the memorandum of understanding, the EIB stands ready to help the EU to implement policies. One policy is to leverage grants in order to have a wider meaning—for example, we have some forest funds—and to engage common land or church land that is not in use in some regions in Europe, and we need the biomass and carbon capture. Why not use the timber land idea from North America also in Europe? Lord Selkirk of Douglas: Can I ask a very quick question about research? We were told when we had evidence from the EU two sessions ago that the Commission gives guidance to Governments but not directly to farmers. Is there a role or an involvement that could be put in place for the British Government to engage in research and in dissemination of that research, or, if not, their own research in co-operation with somebody else’s? Dr Harald Jahn: I am only representing the bank. We know best how to mobilise finance, how to allocate it and how to return it to our investors. The Commission and DG AGRI, in the different sub-measures, also have possibilities to finance public/private research and extension services. But it is up to the Governments to include it in the operational plans of their countries and to get it accepted and discussed with their colleagues from DG AGRI. We are only observers. The Chairman: Could we park the question, because I know you will all have something to say on the question of research, innovation and knowledge sharing? I want to explore that in a little more depth in a few moments. So can you hold on to your answers and we will come back to that. Lord Cunningham?

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Q70 Lord Cunningham of Felling: Direct payments under Pillar 1 of the CAP provisions get mixed reviews. Some people think they are a good bulwark for farmers against volatility and price falling. Others argue that they are a block to innovation, modernisation and making farms and farmers fit for purpose. What comments would you gentlemen have on direct payments? Allan Wilkinson: It is certainly a really good question, my Lord. There is no doubt that the industry is facing some challenges at the moment, and obviously it is looking at itself to see how it moves forward. I am not completely sure about the claim that direct payments stall the industry moving forward all the time. I can think of many businesses that have used the support that they get in a really positive and direct way. There may be other businesses for really good reasons or for other reasons that are down to them where they see the direct payment as a means of being able to exist and survive, and move forward. Indeed, if we look at the information that comes through every year from the Total Income from Farming data that is collected, subsidy and certainly direct support is a high proportion of the net farm income that is declared. There are farms in less advantageous places where that direct income and support is essential not just to that farm business but to the wider community. So I am extremely careful to highlight that in some places it is needed. In the context of this inquiry, one of the things that a future CAP needs to look at is how it can manage the better times and then the less brilliant times. The point that direct payments are made whatever the season and whatever the price does not help the inquiry and the purpose for which we are sitting here today, because it is paid come what may. Lord Cunningham of Felling: Regardless. Allan Wilkinson: Yes; you are absolutely right, my Lord. Lindsay Sinclair: We believe that the presence of direct payments influences our customers’ views about the necessity of business interruption insurance, and there is a much lower take-up among farming customers of business interruption insurance than there is among non-farming commercial customers in the belief that they will have an income anyway. But the other side of the coin is that we see farmers, in terms of innovation, diversifying a great deal as well so that they are not entirely reliant upon one stream of income. We see innovation in a different way perhaps, certainly in terms of diversification. Lord Cunningham of Felling: Do direct payments make you more or less likely to give financial support to farmers who may be in difficulty or who may be thinking, on the positive side, about innovation and modernisation? Do they play any part in your judgment?

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Allan Wilkinson: As far as HSBC is concerned, the way that we look at the business is all the income streams that would be around that business. As I said earlier, each business is different even though they might look fairly similar from the farm gate. We take into account the support or the other sources of income that would be available to that farm. We have heard earlier this morning that there are a number of farm businesses that do not get any support at all. That might be because the support is going somewhere else within the landlord or whatever, or it might be an enterprise that is not supported because it is intensive horticulture or even the pig and poultry sector. Lord Cunningham of Felling: Pigs, potatoes and poultry. Allan Wilkinson: That is a fascinating combination and perhaps for another discussion. Coming back to the question, we would look at the whole. We would not make any particular reference or put any particular policy in place because they either get it or they do not. Oliver McEntyre: I have nothing particularly to add. We look at the whole view, whether that income is from beef, sheep, milk, cereals, camping, campsites or holiday cottages. We tend to look at the whole picture. The Chairman: Let us ignore some of these contradictions. Lord Cunningham has just talked about one. We have two very different views about direct payments. Two other opposing views we get are about diversification versus specialisation. Some people are arguing that farmers need to specialise more; they need to be bigger; in that way you can have the innovation and so on. Then others say no; the way to deal with volatility is to diversify. We have heard evidence for both. From your financial perspectives, what are your observations about those two views? Allan Wilkinson: I am probably going to be quite controversial and say that all that you have said is correct in the fact that there are parts of the country where the enterprises are quite small; they have diversified; they are incredibly resilient; they are very dependent on the support that is paid. There are other parts of the country and in different systems and enterprises where they have specialised, and some of their cohort probably need to specialise a little more in order to compete. The UK agricultural industry is extremely diverse, and we try our very best to understand our customers in each of those places that I have tried to describe. I suppose we end up looking at how good the management ability of those individual businesses is to undertake the activities that they have started upon.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Oliver McEntyre: For us, one important factor when looking at diversification is the strength of the underlying business. It does not matter what the markets are doing. There are farmers who make money even in a flat market, whether it is beef, sheep, cereals or milk. It is developing that management, character and ability of the person who is going to drive that business forward as to whether that will be cash-positive or potentially cashdraining if it does not take off. The area of specialism is quite an interesting one. Prior to joining the bank, I was a self-employed business consultant. In my SWOT analysis I used to put: “Strength: concentrating on dairy”, because then you can pull in those skills; you can afford a decent cowman or get that input from a specialist vet. In the next section under “Weaknesses”, it is a weakness because it is all you are producing. It is eggs in one basket, is it not? The Chairman: Thank you. Lord Rooker: I have a couple of follow-up questions. Would I be unfair in summing up what you have just said in answer to some of the questions from Lord Cunningham that, in respect of pigs, poultry, horticulture and the wider manufacturing industry, you are capitalists, but when it comes to the farmers, who are feather-bedded by subsidy payments paid irrespective of how efficient they are, you are quite content to operate a non-capitalist programme, as it were? In other words, you keep them in business; they do not innovate; they still get the subsidy; you get your interest payments. Is that a very unfair way of putting it? Allan Wilkinson: My Lord Chairman, I think that might be slightly unfair. I have to answer your question, though. When we look at those enterprises, clearly we are dealing with people. Fundamentally, we are dealing with people. In understanding those ambitions, aspirations, opportunities, challenges, the circumstances of the family and the other people involved in the business, all those things might be true, because, if they meet their aspirations and we have maintained a very professional banking relationship with that enterprise and that family, then we have met their criteria and we have met our criteria. Some people are incredibly ambitious and they want to achieve things that are really top of the tree in expectations, efficiency and the like, and we meet those in each sector. We have some extremely ambitious farmers, certainly younger farmers, in some of those enterprises that might be seen as less progressive than horticulture or poultry. We have to take into account the individual circumstances.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Q71 Lord Rooker: I was being unfair there, but my colleagues will appreciate I was paraphrasing, basically, from one of our witnesses of a couple of weeks ago, although some of my own views are there from my own experience. I have a question on the issue of the business approach of farms, their acumen, entrepreneurial drive and skills. I declare an interest in that there was a time when Lord Curry brought a couple of dozen young farmers to Defra when I was there one afternoon to discuss this; it was in David Miliband’s time. I was absolutely in awe, because the language they used in discussing what they wanted to do and what they were doing was completely and utterly different from anything I had heard from traditional farmers. The mindset was completely different. I want to ask you about the barriers they face. Diversification is important. In regard to barriers to widening the business approach, do you detect that as a lack of business skills in things that could be done? Are there barriers involving something that no one here has mentioned this morning—planning laws? Do they figure as a barrier to farmers wanting to do other things to innovate in farming or nonfarming and making use of the land in a different way? Are those areas that you come across as bankers when you are discussing their plans with them? Allan Wilkinson: I really do understand the question and I think there are several instances where we see an inbuilt frustration because we need to work with the planning system if they are looking to diversify or, indeed, more generally, garner new opportunities. Finding new opportunities to expand the business might be by taking on a few additional acres on a farm business tenancy or even trying to expand by taking on an additional dairy herd or whatever. Finding those opportunities is probably the hardest part. Exploring them, understanding them and then executing them is still challenging, but it is much easier once you have identified the opportunity. I have just helped a young farmer under the age of 30 find a new opportunity. We have been looking for over 18 months. They are a family friend and they are somebody who, through their own circumstances, will not be able to succeed on their own farm, but there is an excellent young dairy farmer. Finding where those opportunities are, without being able to easily identify the barriers, is really difficult. Lord Curry of Kirkharle: How concerned are you about the age profile of farming following Lord Rooker’s question? For a long time, I have jokingly said I was the average age of a farmer, but medical science has not helped me, with my longevity, to maintain that position. The debate rolls about whether farmers are 57, 58 or 60, or whatever, but the average age is around that.

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) Allan Wilkinson: I think the average age has been 58 for probably two decades, so your point is well made. Making sure that the industry harnesses its young talent is paramount. This is only anecdotal, but with an increasing number of farm businesses we find that the strategic decisions, particularly in exploring the opportunities referred to in the previous question, are increasingly taken by the next generation. Helping the older generation continue to live in the farmhouse, probably maintain pension and other sources of income from within the business, is probably where the challenge lies, but in decision-making we are probably sensing that those are being taken by some of the next generation. Lord Curry of Kirkharle: But are we attracting enough new talent in to fill these gaps? Allan Wilkinson: Are we attracting in enough people from outside the farming community and outside the rural community? Probably not. Oliver McEntyre: They are two excellent questions. Last week I spoke to around 50 young farmers at the Entrepreneurs in Dairying group, which is run by AHDB and RABDF. I have already spoken to two or three of the groups this year on business planning, how you access finance and what you can do if you are starting with nothing. Last week I was asked to talk about succession planning within family farming businesses, and the title of that presentation was “How to talk about the elephant in the room”. The average age of a farmer in the UK is 58/59; it seems to go up a year every year, does it not? I would agree with Allan. There is a whole generation of farmers in that under-40 bracket who are making those key decisions. It is not talking about succession planning. It is talking about that strategic plan, looking at one to three years, four to 10, 10 to 20/25 years, and sticking that plan in place so that there is the knowledge of succession to bring people, as Allan has pointed out, who are already involved in the industry to maintain and keep them in the industry. In response to the question, “Are we attracting people from out of the industry?”, probably not at the minute, but I think people who are not involved in agriculture have a certain view of it, when it is one of the most highly technical industries there is. What used to take 10 men a week to do, now one person with a couple of spool valves and a couple of levers can get done in half a day. It is that sort of message that we need to get out there to people who are not involved in the industry, and not farmers’ sons, daughters, nephews and nieces, to get people into an industry about which, as you can probably tell, I am quite passionate. Lindsay Sinclair: Can I draw a number of threads together here? As to the first question, we would see farming as a very diverse sector and there are some really strongly entrepreneurial people in that area as well as some, perhaps, who are more traditionalists,

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) who need support. Therefore, certainly, excellent training and skills development is vital for farmers to successfully tackle the move to free-market and use of technology effectively. We see through the take-up at colleges greater interest from young people in coming into farming, and it has been a great focus of ours in engaging with colleges—and specifically in two areas. One area has been around farm safety, where the older generation would point to the younger generation and say, “We have bad habits already. So get them while they are young and form better habits”, because there is a clear cost both in lives and livelihoods around the poor record of farm safety that needs to improve. The other area, as has already been touched on, is succession planning. It remains a very difficult topic in our experience for younger farmers to engage with their parents. We have recently established a farm succession service together with the University of Exeter and Duchy College specifically aimed at this, because I think it is very important to the long-term viability of farm businesses. The story is told of somebody coming up and saying, “I am very interested in the service you are offering. I am 60 years old. I think it has been very difficult to have a discussion around the future of our farm”. We said, “Would you like us to come and talk to you and your son?” He said, “No. It is me and my father”. It is a problem that extends quite a way and there is a lot to do in terms of farm succession planning on which we have only just begun. The Chairman: You would almost have to get into family mediation in some cases, I suspect. Lindsay Sinclair: Indeed. Q72 The Chairman: We have come to the end of the time. Very briefly, are you able to comment on how much of a problem access to broadband is in rural areas, because I suspect that it is not now just about filing your tax returns online but all the advice services and so on? Lindsay Sinclair: I believe it is a very big problem and one that does need to be tackled, because farmers are engaging increasingly with technology. It is already a large part of farms, but it is becoming more so. You mentioned the greater engagement of farmers with technology. Areas like the single farm payment are now all based on having access to a good, computer-literate and well-supported broadband community. Lord Trees: I know time is pressing. One of the key knowledge things, apart from the technical issues that farmers need to have, is business knowledge. In terms of competitiveness, costs of production are key. Can you give me a snap answer, because you

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Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73) guys have been looking at a lot of farm businesses individually? What proportion of farmers really know their costs of production? Allan Wilkinson: By sector, it is very variable: from 100% in certain parts of the poultry, horticulture and pig sectors, probably down to approximately 10% in some of the upland livestock enterprises. That is a guess. Viscount Hanworth: Can we have two guesses? Lord Rooker: What about in dairy? Allan Wilkinson: In dairy, it is somewhere between 10% and 30%. Oliver McEntyre: This is an educated guess, but in the dairy sector now, after the last two years, I would pitch that slightly higher than that. But I would agree—I would, being a pig farmer’s son—that the pig and poultry industries, in that sort of recording system and business knowledge, are quite far ahead of some of the other sectors at times. Q73 The Chairman: We have trespassed on your time rather more than the hour that we had hoped, but I want to take a few more minutes to ask each of you to say maybe three sentences about one thing that you would like a reformed CAP to do. That is a very tough ask, but could you give us one thing in headline terms? Allan Wilkinson: In three sentences, I would say a greater focus on the understanding of the market and the global circumstances of food supply, food demand, where, when and how. Within Europe, we have to think about how we link farm gate and customer and think of all the things, not just economics but a lot of other opportunities, including health, new products, new developments, even new crops and new technology. Then we should look at something that helps the industry to cope with volatility, because there is no doubt about it: volatility is not going away and it is probably going to be greater than before. It does not mean to say it is worse than it was before, but the industry has to be in a far more resilient place at the point in the cycle where it is low so that it can take advantage of the point in the cycle when it is high. The Chairman: Who would like to go next? Lindsay Sinclair: It is not clear that volatility is worsening but certainly it continues in the short term. That should certainly be a direction that is looked at. The only other thing I would add to what Allan has said is that the other side of it is the concern about the effect on less efficient and more vulnerable agricultural organisations; you can see the failure of small farms and their amalgamation. So, on the one hand, there would be efficiency savings, but loss of farmers with a lot of specialist knowledge on the other hand.

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We would have to be aware of the consequences of our actions in the longer term. Perhaps the final piece in the shorter term is that direct payments are made more promptly. That has been a large cause for concern. Delays to expected cash flows of businesses have put them under particular pressure. The Chairman: Thank you. Dr Harald Jahn: I would like to go one level above the country or regional level. If we want to talk about policy in agriculture, there are two main aims: how to live in harmony with nature by using nature in an acceptable manner, with the purpose of feeding human beings to fill stomachs with healthy and safe food. My understanding—and I am also from a family which has been in this (farming) business for centuries—the second aim is to try to respect to survive, in good and bad times. The main factor of success was to have the value chain, which is a modern name, but all stakeholders in the chain who fill the stomachs of rural and urban dwellers have to respect each other and respect the risks and the links they have, and try to mutually share the risk if possible for long-term sustainable development. I mean all: from the landowner, the organisations responsible for water-based management, afforestation, to reuse wind and flood erosion, to politicians, to storage facilities, to innovation: and if we get new technologies like IT, to increase information-sharing. But the main thing is that all shareholders should learn to respect each other in the food value chain. Thank you. The Chairman: Thank you very much. Mr McEntyre, the last word to you. Oliver McEntyre: I am not sure it is within my remit to decide what should come in the next form of CAP. Perhaps there is the payment mechanism itself. So many farmers rely on that payment coming in. I know it has put an awful lot of work on to the backs of our industry in putting facilities in place when that money has not come in in the first week of December, and there are still an awful lot of farming businesses still waiting to receive it now. The Chairman: Thank you very much on behalf of the Committee and me. It has been a fascinating session, with more years of farming experience than I would care to think about. It has been quite inspiring in that sense, so thank you very much indeed for giving up your time this morning.

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Centre for Excellence in Logistics and Supply — Written Evidence

Centre for Excellence in Logistics and Supply — Written Evidence Introduction CELAS is part of a collaborative venture between Food supply chain experts from Harper Adams University, University of Huddersfield, University of Northampton and Royal Veterinary College, offering expertise across disciplines within the farm to fork and beyond food chains, such as veterinary science, food testing, human behaviour, supply chain operations and circular economy/waste.     

Our response to the Lord Select Committee’s inquiry into the UK’s food resilience is two fold: An overview of the current trends in the holistic food supply chain, allied to research in the business and academic spheres. Using the current trends of risk and resilience profer discussion around: Should public policy responses make a distinction between support for the resilience of the industry as a whole, support for the resilience of specific sectors and support for the resilience of individual units of activity? What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions?

Current themes affecting UK food supply chains. Our research1 completed a horizon scan of business and academic literature in the areas of food fraud/crime and supply chain resilience. This signposted 2,596 peer reviewed research articles related to food crime and fraud, contained within a wider library of 110,465 articles on supply chain resilience. Under further examination, no identifiable research has been performed in the context of mitigating an SME’s exposure to food supply chain risk and fraud, signifying an inadequate understanding about this critical area of risk and resilience to the UK food industry, which across Europe is made up of 90% SME’s. Furthermore, our research also found that within the food industry risk is focussed around aggregate event driven cause and effect relationships, with little correlation being passed upstream in a supply chain. Once more, this lack of comprehension of the connection to fraud, risk and resilience in a food supply chain context, is causing a disconnect between the most prevelant actor (the SME) and the wider holistic supply chain. DEFRA (2013) have themselves identified a need to embrace collaborative practices to strengthen the nutrition, safety and quality of foodstuffs in the supply chain. Therefore, when we consider UK manufacturing alone employs circa 3.8 million people, contributing £96 billion (7.3% GVA) and that the vast majority of these businesses are SME’s, it is crucial that greater visbility is fostered to permit more detailed understanding of holistic food chain risk and resilience. It is only when this collaborative use process and data comes to the fore that actors within the supply chain will be better placed to deliver solutions that deliver better outcomes for society as a whole. The authors purport that this lack of ability to address collaboration across food supply chains, will lead to a perfect storm of rising reliance on imports and ever increasing demand, 1

Fassam, Dani & Hills, 2015

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Centre for Excellence in Logistics and Supply — Written Evidence leading to risks of criminality and fraud in a supply chain. It is therefore paramount that strategies are put into place on a National level that connect food supply chain actors in a way that encapsulates consumer activity, legislation, systems and science. This connected supply chain will not only permit stakeholders to share information to reduce risks pertaining to criminality and fraud, but further reduction of waste. Our research (Batista et al 2015) has highlighted that supply chains whom do not understand the processes that exist between differing holistic supply chain actors are more likely to be unsuccessful. Therefore, this strengthens the afformentioned argument that greater holistic supply chain understanding is required to effect change to resilience in a supply chain. The challenges of traceability are further strained due to the research asserting circa 1.3 billion tonnes of food disappears globally without trace (Nelleman, 2009). This demonstrates the challenges currently with food supply chains, whereby the lack of connectivity and traceability is unable to measure ‘losses’, ‘criminality’ or ‘fraud’, therefore creating risk to the future resilience of the food system at large. The food sector comprises 90% SME’s and it is this area that lacks the funding and resources to create innovative solutions to close the gaps in holistic supply chains to combat fraud, risk and resilience. DEFRA supports this with its desire for supply chain actors to cultivate a collaborative research culture to deliver proper frameworks for smaller operators in the food sector, to combat criminality, reduce fraud and risk, making resilient food supply chains a reality. Governments and Intelligence agencies have suggested that food supply chains are an easy target for criminality due to having weak resilience. It is essential that deployment of collaborative research in the areas of inventory and procurement risk is undertaken, with a specific focus on SME’s in food supply chains. In addition, opportunitist behaviour upstream in the supply chain can manifest itself due to ever tightening margins, need to supply increasing demand and monopolistic behaviours shown by procurement functions. Couple this to a lack of holistic visibility and risks of the ‘human factor’ become more of a challenge to food supply chains. Addressing the need to communicate and educate There is much in terms of risk and resilience research, but very little in the specific arena of food supply chains and impact of criminality / fraud. It is the view of the authors that in addressing resilience in agri food supply chains and reviewing public policy, it [Government] must appraise the holistic supply chain and understand the effect this has on specific actors. This [legislative understanding] is particularly important as 90% of the food chain comprises SME’s, therefore legislation must be tailored to the needs of same in terms ‘user friendliness’, as quite often this [legislation] is easily adopted by corporations with larger budgets/teams of experts and lost on smaller operations with constrained operating budgets and understanding. Furthermore, as with DEFRA desires, greater consideration is needed with upstream actors in a food supply chain, an area where Business, Governments and Researchers need to come

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Centre for Excellence in Logistics and Supply — Written Evidence together in a more collaborative function to achieve research outputs for holistic supply chains that deliver against tangible risk and resilience models. Quite often we talk of ‘digital skills’ and how this coupled to big data will be a precursor to reducing risk and making resilience in a supply chain easier. This is achievable in a conurbation with great connectivity; however many of our farming communities are on the fringes with this connectivity/technology and even if the utopia of a connected food supply chain was born, the upstream farmer would be at a dissadvatage. Therefore, more efforts need to be placed around supporting upstream elements of a supply chain with technological resources to assist bringing true resilience to the fore. In addition; quite often the food supply chain is a reactionary process, after all it is very difficult to predict 18 months ahead when for example planting oats, that yields will be affected by weather related incidents. However, by having a connected supply chain information system, more can be done to alert downstream elements, which will give the opportunities for manufacturing to react accordingly. In tandem; closer sharing of information from the retail sector across the upstream supply chain actors could assist with better product placement. If farmers are aware of the horizon of change within the food industry earlier, a collaborative approach to development could take place. Conclusion CELAS has identified a gap in current research , whereby little is being done to understand the gap which is easily exploited by criminality. Furthermore, this research supports the view of DEFRA in embracing a more tangible approach to outcomes, with holistic supply chains needing to be more involved with the traditional academic process to deliver outcomes that are realistic in nature. The technology that is available across supply chains is not being deployed to good effect. Quite often food supply chains will only go down to a couple of tiers, leaving visibility down to farm almost non existent. Furthermore, with farmers dumping huge ammounts of food due to its non-compliant nature, more needs to be done with connected systems to encourage alternative routes to market. This would be a more engaging process to the actors working hard to survive in a margin constrained industry. Finally, our over reliance on food imports is creating the perfect storm of risk in terms of criminality and fraud; with no extended global visbility, an opportunity presents itself. 4 December 2015

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23)

Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23)

WEDNESDAY 16 DECEMBER 2015 11 am Witnesses: Philip Bicknell, Ross Murray and Paul Wilson

Members present Lord Bowness (Chairman) Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Krebs Lord Rooker Lord Selkirk of Douglas Viscount Ullswater Baroness Sheehan ________________ Examination of Witnesses Philip Bicknell, Head of Food and Farming, National Farmers’ Union, Ross Murray, President, Country Land and Business Association, and Paul Wilson, Professor of Agricultural Economics, University of Nottingham

Q12 The Chairman: Good morning, gentlemen. On behalf of the Committee, I apologise for the fact that the Chairman, Baroness Scott, is unable to be here. Unfortunately, she is not well, but nevertheless we welcome you and thank you very much for agreeing to give evidence. Can I point out to you, as you will be well aware, that this is a formal evidencetaking session of the Committee? A transcript will be produced and put on the public record in printed form and on the parliamentary website. You will be sent a copy of the transcript so that if there are any minor errors you can revise it, but that is after it will have gone on the website initially. The session is on the record. It is being webcast and that webcast will also be on the parliamentary website in due course. You have been told of the interests that

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) members of the Committee may have. If any members have any relevant interests, I would be grateful if they would declare those when they first speak or ask a question. You know the questions that we have asked. We are concerned about price volatility and creating a more resilient agricultural sector. Before we move to the questions, can I ask whether anybody wishes to make a short opening statement, or do you want to go straight to the questions? Ross Murray: If I may, Lord Chairman. We very much welcome your inquiry. It is extremely timely that it has come now because we are at the nexus of an extremely poor farming year across all sectors. It is probably unique this year that it has affected virtually every agricultural sector. From my own perspective, my organisation insists on taking a long view on matters—we are mostly intergenerational, family-owned businesses—but we are familiar with volatility. It is a business reality and we live in a world of world markets. The danger is in the extremes of volatility. UK farming can be characterised, in general, as small and very isolated business units. We have no control over the weather; we have little control over input prices, which are greatly influenced by oil; we have little control over commodity prices; and we are affected by currency. Those four factors influence the profitability and volatility of farming as an industry. We are really price-takers. The question that your inquiry is asking—whether we are resilient—is a difficult one to answer now in December. We will see the answer to that in the next two years. My sense is that the majority of British farmers will still be farming, but it is what the fallout will be, because I am quite clear in my own mind that the storm clouds are gathering either way. Philip Bicknell: I echo what Ross says. From my perspective, volatility is a huge challenge for our industry. It is a challenge that is only going to grow as the market management mechanisms that we have seen of the Common Agricultural Policy are unwound. My primary concern is around investment. Uncertainty over volatility means uncertainty over prices and profitability. That uncertainty is what kills investment. Farming, as Ross suggested, is an industry that takes a long-term view. If we are unsure of where the industry is going to be in two, three, four or five years’ time, let alone looking at a decade-plus, that starts to create some big challenges in the large-scale infrastructure investment that we need to face in those productivity challenges of the future. The Chairman: Mr Wilson, do you have any remarks? Paul Wilson: I am happy to go straight to questions.

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Q13 The Chairman: Thank you very much. You touched on this in your opening statements, but can I open by asking what effect has volatility, as opposed to low prices, had on farmers of the country? Has that effect been across the board or are some farm sizes or types, their tenure or particular sectors, been more exposed or affected by price volatility? Has the recent period of price volatility posed a particular challenge to farmers as opposed to the previous periods of volatility? Who would like to start? Paul Wilson: Perhaps I could start. Drawing on the data that we collect as part of the Farm Business Survey that Defra funds, within England, trying to take some of those particular aspects, I do not think that farm size is a key factor in determining ability to cope with volatility. There are inevitably differences with respect to farm sizes. However, it is not the major determining factor. Farm type has a large influence with respect to farmers’ ability to cope. For example, cereal prices have come down from a relatively high price point after being at a very low price point in the early 2000s. Cereal prices have gone up and now come back down, not to the levels of pre-2007 and 2008. The other side of that coin is that when it comes to cereal prices, if you start to think about pig and poultry producers, and dairy producers to some extent, some of those sectors rely heavily on cereals as an input. Typically, you observe that, when those cereal prices come down, those other sectors tend to perform better. There is definitely an influence of how the volatility affects different farm types; as to farm sizes, less so. There are sometimes impacts on farm tenure with respect to those farms that have entirely owned land, which are not relying on paying mortgages. They can withstand greater price volatility to some extent because they are not incurring those rental costs. Tenants, inevitably, are a little more constrained in that respect because they are incurring rental costs, and the volatility particularly can impact on the tenured sector because, when those prices come up, there is a drive for those rents to go up following that price rise. On the downward path of those prices, some of those tenants will be incurring relatively higher rents than they were historically. Sometimes the volatility impacts very much relate to the dynamic aspects of when those price and cost changes come forward. I will hand over to the others in a moment, but, trying to put the recent period of price volatility in context, the early 2000s represented quite a low period of agricultural prices—I would say, historically, very low. The price spikes of 2007-08 sent prices generally higher and they have come back down. The outlook for agricultural prices is that they will not get back

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) to the price spikes of 2007-08 in the near future, but nor does the evidence suggest that those prices are going to go down to the lows that we observed in the 2000s either. The Chairman: Thank you. Does anyone wish to add to that? Ross Murray: I would echo the point about no particular sector being any more vulnerable than the others. They are all vulnerable to volatility at the moment. The interesting thing is trying to work out, within sectors, farm types and tenure types, those that have good management and those that have less good management. It is control on costs and therefore some prediction of profitability that is the critical thing. Philip Bicknell: We see differences across sectors and some of that relates to the tools that different farm types have to manage. In pigs and poultry, because we have seen volatility in feed costs, because they are quite integrated businesses within the supply chain, we see things like feed price ratchets so that, when the cost of feed goes up, then the price paid to the producer will go up. Similarly, when the price of feed goes down, that will be reflected in the price ratchet. In cereals we have futures prices, which give an indication of where the price is going to be in a couple of years’ time. That gives farmers options and choices. The fact that you could have sold the crop before you have decided whether to put it in the ground starts to give flexibility and choice. When we look at dairy and red meat, we perhaps do not have those options. Yes, in dairy, we have cost-of-production contracts for some of our liquid milk; Tesco, Sainsbury’s, Waitrose and the Co-op all have those sorts of mechanisms in place. However, that only applies to liquid milk, and I am conscious that a big proportion of what we produce goes into manufactured dairy products, whether that is milk powders, butter or cheese. From a red meat perspective, it is very much a price-taker. From talking to NFU members, they would certainly like to see something that gives a better indication of where the beef or sheep price is going to be at some point in the future. A solution that I would like to see explored much further is long-term contracts, which start to give some degree of security and indication of where price may be. Lord Curry of Kirkharle: On the milk price contracts, you mentioned Waitrose, M&S, Sainsbury’s and Tesco, but I think I am right in saying that it is only about 10% or 15% of the total milk market that is subject to a price contract. Philip Bicknell: That is correct, yes. I cannot remember whether it is 13% of producers and 17% of milk production—I forget the numbers—but it is certainly the wrong side of 20 from my perspective.

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Paul Wilson: Certainly from our research, those dairy farmers who have dedicated supply contracts are the most satisfied with their milk contract, albeit they are a small proportion of the milk-delivery sector. Q14 Lord Cunningham of Felling: Is it true that price volatility is occurring more frequently now than it used to do in the past? In the last few years, have we seen more price volatility than we did in earlier years, or is that not true? Paul Wilson: I think that is true. As I mentioned earlier, the early 2000s were a period of low prices; they were relatively stable but low, whereas from the 2007-08 price spike there has been a period of volatility. Future volatility is likely to be a feature of farming, given climate change impacts and major production swings across the globe. For the vast majority of the commodities that farmers produce, they are operating in a global market. Therefore, when something happens in the States, Australia or Russia, it has an impact on the world price of those commodities and the price that farmers face. Even though the volumes traded on the global market might be relatively modest, it is that trade that makes the price. Lord Cunningham of Felling: Every farming sector is going to have to get used to frequent price spikes or drops, or whatever it might be. Price volatility is something you are going to have to live with. Paul Wilson: I would argue it is something that farmers will have to pay a lot more attention to, yes. Lord Cunningham of Felling: Is anyone looking at this—in the last two or three years— and trying to identify what the overall consequences are for farmers? There is a tendency to assume—I am not saying we do or the Committee does—that price volatility is always a bad thing. Is that so or not? Paul Wilson: I do not think price volatility should always be seen as a bad thing. The price volatility that farmers experienced in 2007-08 was a good thing for cereal farmers. It allowed them to reinvest because they had been living on, effectively, depreciating assets, particularly machinery, so it allowed a period of reinvestment. On the upswing of those prices, farmers are able to make profit. It is on the downswing of those prices that things tend to get very sticky for farmers. Volatility in itself is not necessarily a bad thing. It is how farmers manage it and how those prices are determined within that cycle of price volatility. Lord Cunningham of Felling: What about the practitioners? Philip Bicknell: From my perspective, volatility makes planning difficult. In a previous role when I was working with farmers acting in a farm advisory capacity, you would do sensitivity

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) analysis that looked at prices or yields changing by 10% or 15%. Of course we have seen the dairy price fall by over a third. If you look back to where the wheat prices come from, over about 18 months they have fallen by a third. That whole planning exercise and regime is much more difficult to do, hence the question mark over businesses and making some of the longer-term investments. As Paul said, when we saw higher prices, we saw investment in plant and machinery, perhaps stuff that has a shorter lifespan. We perhaps have not seen the level of investment in some of the farm buildings and storage that, ideally, we would like to see to make sure that we are having that consistent level of investment. Lord Cunningham of Felling: This is my final question, if I may, Chairman. If what you are forecasting becomes fact, what are the medium and long-term implications of the failure to invest? Philip Bicknell: The implications are about our ability to produce in future. It is something that I feel personally the supply chain has been a bit slow to wake up to. Against this, we are also seeing a change in the Common Agricultural Policy. We do not have a policy that is or was designed to maintain production, to try to manage production and output. We are responding much more to the market signals. If we do not make money in one year or the year after, that starts to question our viability for future years. As to your question about what actions are being taken, Defra is predominantly focused on some of the dairy sector initiatives, looking at how futures can start to help and how better information can be provided. It is something that is getting interest at a European level on futures, particularly from an inputs perspective, and we know that the levy boards, increasingly, are looking at how we can give farmers the right business support to help them adapt to the volatility. Ross Murray: I would say no to your question about volatility and whether it is necessarily a bad thing. Business people must respond to market swings and always look at them as an opportunity. The danger lies in the range of volatility, as I said earlier. The consequence of this emerging theme of greater volatility inevitably is going to hasten restructuring within certain sectors of agriculture. That is inevitable and that is the public policy interest area as to how agriculture in Britain is going to adapt in the next two or three years. Lord Cunningham of Felling: You are saying those who cannot cope with it would leave. Ross Murray: I think they have to—they will be forced to—and the banks will have a major role in that. Viscount Hanworth: Are you talking about levels of consolidation?

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Ross Murray: I would have thought there would be a high degree of consolidation, yes. Philip Bicknell: The average farm size has been trending upwards over a period of time and I expect that to continue. In some sectors you will start to see maybe larger suppliers working with smaller suppliers, trying to integrate the supply chain a little more. That is what we are looking at probably five or 10 years down the line. Ross Murray: It would be a mistake to say there is not a role for small farms. The critical thing is not the size of the farm but its profitability and ability to manage itself accordingly. Viscount Hanworth: Are statistics on farm sizes readily accessible to us? Philip Bicknell: Yes. Viscount Hanworth: I will ask you later to give me the sources. Philip Bicknell: Paul probably can do that as to the farm size data. It is something that would be tracked by— Paul Wilson: Yes. Viscount Hanworth: Also, I would like to be able to access the price volatility data and look at it to substantiate the claims of increasing volatility. Paul Wilson: There is quite a lot of data that is published on things like farm sizes, farm structures and farm price volatility. Viscount Hanworth: You will be able to give us an overview on that. Paul Wilson: I cannot do it instantly, but I will be able to dig it out. Viscount Hanworth: No, but take it back and then forward to us the sources, yes. Paul Wilson: Absolutely. Q15 Viscount Ullswater: Could you help us with this? Is price volatility the same across the UK or does it differ between farmers in the devolved areas? Are some devolved areas of the UK mitigating the effects of price volatility on farmers better than others, and what are they doing, if they do? Paul Wilson: The regional differences with respect to the devolved areas come down to the farm types that are typically operating in those areas. Within Wales, for example, there are predominantly beef and sheep farms, whereas in England there is quite a mixture of different farm types. In Scotland, there are quite a lot of beef and sheep farms, upland farming, as well as a mix of some dairying and arable. It is not the devolved regions with respect to their farms per se because of the regions; it is because of the farm types in those regions. Coming to the point about what those devolved regions are doing and if they are different, that is where things get slightly interesting because of the implementation of the Common

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Agricultural Policy, which I would probably argue is now as uncommon an agricultural policy as we have ever observed in its history, because within England farmers receive a flat-rate payment for the area that they farm. Within Scotland, some of the subsidies that they receive are still linked to production, particularly with respect to beef and sheep. Also, in Wales, there are still some aspects of activity that are linked to what those farms are doing with respect to their farming. There is a difference in how things are operating across the devolved regions from a Common Agricultural Policy perspective. Viscount Ullswater: Is that what you see as being helpful to farmers? Paul Wilson: Certainly within those devolved regions of Scotland and Wales, it provides some help for those specific sectors; the more suckler cows you have in Scotland, the more subsidies you will receive, whereas in England it is very different. There is an uneven playing field even within the UK and the devolved areas. Lord Krebs: To extend the discussion of the devolved regions, you did not mention Northern Ireland at all. Paul Wilson: I did not, I am afraid. I am not as familiar with Northern Ireland as I am with the other regions. I do not know whether other colleagues on the panel are. One of the interesting things about Northern Ireland that I may comment on is that, when you look at the milk price volatility recently, Northern Ireland milk prices have come down considerably more—in the order of about 4p per litre more. To put that in perspective, farmers were relatively recently receiving about 30p and they are probably now down in the low 20s of pence per litre. Within Northern Ireland, that fall has been even greater lately. Philip Bicknell: That would be reflected in the structure, so a big proportion of that milk will be going into milk powder processing. Skimmed milk powders are one of the areas on the global commodity markets where prices have fallen pretty significantly. Lord Krebs: Could I extend the question one step further? In relation to all the things that we have discussed so far, are there lessons to be learnt for the UK farming industry from what is happening in other European countries? Presumably, the effects of price volatility are not a UK problem—they are a farming problem—and many farms in other parts of northern Europe must be quite similar to those in the UK. Are they doing things the same way as us or are there things we can learn from them? Ross Murray: There is some very impressive co-operative working on the continent and, traditionally, co-operatives have not fared well in the United Kingdom. The more we can

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) encourage UK farming to cluster together and deal with issues of cost, smart marketing and finance, the better, because we are little islands within our farming sector. Lord Krebs: That is something we have been talking about for decades. Ross Murray: It is, yes. Lord Krebs: It is the same old story: why has nothing happened? Ross Murray: I am afraid it is a cultural problem. Philip Bicknell: In the dairy sector we have had Dairy Crest Direct become the first producer organisation, a formal recognition of that co-operation and collaboration. I am aware that in Scotland a group of dairy farmers supplies into a cheese site that is on the road to gaining producer organisation status. There is quite a bit of opportunity, but now is the time to try to make sure that we have that collaboration and we take a more joined-up approach. In answer to your question about Europe and what we can learn from there, I was aware, certainly when the framework of the current CAP was being discussed three or four years ago, that there is ability within the CAP package to offer mechanisms that facilitate income support. In looking at some of those across Europe, you will see that there are no stand-out examples of things that have helped. They have either been insufficient to deal with the problem when we have had very low prices or they have not been utilised. The challenge, I suppose, in looking within the CAP, would be that there is ability to use funds to offer that sort of model where you can help in times of crisis, for want of a better word, to use that income, but that would be funded by lowering direct payments. You might be helping one sector or group of farmers, but you are reducing the level of payment that will be available to all. As to the other aspect around rural development programme funding, which is the second pillar of CAP, I am conscious that in some parts of Europe and other parts of the UK some of that funding is used to help productivity, knowledge transfer, training and innovation, all of which can help farmers adapt to the new challenges. In England, we spend the best part of 90% of our rural development programme on agri-environment schemes, and the productivity and growth strands are both areas that have been hit by the reduction in Defra spend as part of the comprehensive spending review. In others, there is probably more funding that is allocated to addressing some of the challenges that we might have in how we apply that Common Agricultural Policy element.

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Lord Cunningham of Felling: This might be what people would call a curve ball, but, in view of all these problems and difficulties, would British agriculture be better off outside the European Union rather than in it? Paul Wilson: Perhaps I can start with that one. I guess there are advantages and disadvantages. Lord Cunningham of Felling: Pros and cons for and pros and cons against, you mean. Paul Wilson: Indeed. I am sure we will hear lots of that over the coming years. At the moment, to deal with the Common Agricultural Policy specifically, it is providing a large proportion of farmers’ income. In the most recent financial year, 2014-15, ending March 2015, the statistics that we produced from the Farm Business Survey show that over half of farmers’ net profit on average comes from that basic single payment that farmers have received. It is providing a cushion with respect to this price volatility that farmers are currently experiencing. When you speak to agricultural bank managers, they are, shall we say, sympathetic towards farmers’ cash-flow concerns because they know that the single farm payment will arrive within the coming weeks or months, and so they are willing to extend overdrafts. If that cushion was not there, we would be witnessing a different scenario at the moment in the short term. In the longer term, as to that policy that exists, if we were outside the EU and those farmers were not receiving that Common Agricultural Policy support, farming would readjust. We would go through a period of structural change where those farmers who were less efficient and less profitable would exit the industry. There would be a greater growth of consolidation in the sector. As to other activities that those farmers would be looking to do, they would probably extend their diversification to try to counteract some of those things. The big challenge that I see from an exit from the EU is that we would be potentially excluding ourselves from market opportunities. That is the bigger challenge that I see moving forward rather than the support from the CAP. Ross Murray: When you do the maths on current data, the idea that there would not be that CAP support for UK farming would be devastating for the industry. The question for a future British Government is which way they are prepared to support rural economies, particularly agriculture. That is what we are going to have to ask as we get towards the Brexit discussion in the next two years. Viscount Ullswater: I need to go back a step to co-operatives because a lot of Welsh farmers got together and produced Welsh lamb, and marketed it as Welsh lamb. Did it

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) stabilise the price for lambs in Wales when they did it? I do not know whether it still continues and whether that was helpful in attacking this price volatility. Ross Murray: I am a Welsh sheep farmer so I am probably best placed to answer that. It has helped but we are terribly reliant on our export market for Welsh lamb. Currency fluctuations hit us and we have had this huge currency fluctuation in the last year with the strengthening of the pound. However good the marketing is and however co-operatively worked, there are always external factors that will influence things. Lord Curry of Kirkharle: For a period, there was a Welsh lamb co-operative. It lasted for a while, was reasonably successful for a short period and then it imploded. Q16 Lord Rooker: I want to ask some questions about opportunities, but, sticking on the issue we are on at the moment, one of you said something about the devolveds that I want to be clear on in my own mind; the memory goes as you get older. In 2006, England went in—that was when I went into Defra, in very unfortunate circumstances; we had forgotten to pay the farmers—with a flat-rate payment. The other three nations took the opportunity, which they were entitled to do, to go towards phasing in a flat-rate payment. While at the moment there are still some subsidies or allowances based on production, surely they are being phased out, because everyone is heading towards a flat-rate payment. Is that not correct? Ross Murray: Yes, it is. There is an adjustment in Wales from the historic basis of payment through to a flat-rate payment, but it is being phased in over a period of years. It is happening. Lord Rooker: Is that not the same with all of them? In other words, it cannot last for ever with the devolveds because they will head to the flat-rate payment. I cannot remember whether it was a 10-year period or not, but it cannot be far from the end of the period, given that the system started in 2006. We got them to 10 years. Ross Murray: You will be surprised how long they have strung it out. Paul Wilson: Yes, I think that is the answer. Lord Rooker: Okay. That move is still going on. Lord Curry of Kirkharle: They have so much left that member states—Scotland and Wales—are still allowed to retain an element of coupled payment even though they have gone through the transition for beef and lamb. Lord Rooker: Okay. Lord Curry of Kirkharle: For beef and lamb.

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Ross Murray: And they do in Scotland, yes. Lord Rooker: I was unaware of that; I am a bit out of it now. I want to make a point and ask a question as to this doomsday scenario you have painted about leaving the EU, which I personally am not in favour of, but that is not the issue. New Zealand seemed to manage okay when it abolished all its subsidies overnight, reorganised the industry and made it more efficient. Why could other countries not do that? Paul Wilson: Perhaps I could address that. First, I certainly hope I did not give the impression that I was in favour of an EU exit, because I am personally not in favour of an EU exit. In New Zealand, in the 1980s, they reformed their agricultural policies, and their subsidies were drastically cut. The consequence was that there was a major restructuring in their industry. We would experience a similar restructuring if the subsidies were taken away tomorrow, for example. Agriculture would carry on; farming would carry on; most of the land would continue to be farmed, but it would be farmed in a different structure and there would be quite a lot of business bankruptcies in the short term while that period of structural adjustment occurred. The Chairman: I am almost getting tempted myself about Brexit, but— Philip Bicknell: I will not comment on that. My understanding of New Zealand and the impact there was that that was also accompanied by a devaluing of the currency, which helped them compete on export markets. I do not think that is going to happen with us. The NFU has not taken a position but has produced a report on the implications. Both Ross and Paul have mentioned the trade angle and the agricultural policy angle. I would throw in a third: what would regulation look like? If we wanted to trade within Europe—and three-quarters of our food and drink exports go to other European countries—I suspect we would still face the same sort of regulatory hurdles as we do now. We have mapped out in that document some of our key questions. I will share that with the Committee if that is okay. We also have some more work coming in the spring trying to look a bit more specifically at the numbers and what the impact would be of Brexit. The Chairman: I am sure we would be glad to receive it. Whether or not we can include it in this report is another matter. If it is in favour of one way or another, I am sure some of us, depending on our views, will be delighted to receive it. Q17 Lord Rooker: I have a couple of questions on opportunities. Given that the farms are businesses, although I am not sure all the farmers I have ever met accept that, and that volatility might look like a cloud—I use the analogy that there is always a silver lining—are

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) there opportunities for businesses in volatility that are there within the framework of the changes? How are we placed in taking up those opportunities and taking advantage of opportunities in relation to what the farm businesses do, or is it just the fact they cannot control it and struggle on? There must be some businesses that positively organise themselves to take advantage of opportunities. What sort of opportunities are there for them? Ross Murray: They have this amazing asset, which is this land. There are many farmers across the country who are diversifying into the tourism and energy sector, and finding alternative forms of income. It allows them to stay on the farm, to live where their home is and carry on farming. It is striking that UK farming is supported by a whole range of different other sectors and people have been very imaginative. Farmers are businessmen and have to be. They have to be entrepreneurial and they cannot rely, in a volatile world, on straight income from farming or, indeed, from very generous support from the public. Lord Rooker: In the main, do they get support from planners in taking advantage of those opportunities? Ross Murray: There is a cultural issue there, and the CLA is for ever banging the drum on a more responsive planning system. There are indications that the current Government are getting it, but there is resistance along the line. For instance, National Parks is very small “c” conservative in its attitudes towards change. We have to keep on pressing the idea that you can do alternative things on farmland and carry on farming. Paul Wilson: The most recent data we have on some of those aspects that Ross mentioned as to diversification is that over half of farms, typically, have some form of diversification, and that is excluding agricultural contracting, which in the national account counts as agriculture. So it is highly likely to be much more than that. The growth in diversification of late has been in renewable energy. The incentives have now reduced for farmers to get into that, but we estimate, from our work on the Farm Business Survey, that approximately 18% of the farmers in England have some renewable energy production going on, on those farms. It is not specifically taking opportunities of the volatility that has arisen, but more, potentially, that they are looking at continuing to diversify their business incomes. Those particular things, such as renewable energy, offer a real stability of income stream that counteracts the price volatility, which, as I mentioned earlier, is determined by trade on the international markets and the fact that with production levels, particularly in sectors where we rely on the outside world, as in the climate—cereals, beef, sheep and dairying—there is a climate

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) impact on your yield. You have two variable factors, and it is not the case that we are such a large country that, if we suffer a major yield reduction, we would have a price rise to compensate for that. We are effectively a relatively small production country in terms of agricultural output. Philip Bicknell: The one opportunity that has not yet been fully realised or grasped is trying to take the food supply chain approach. The reality is that, if prices are low for a sustained period, for some of our biggest retailers and food processors they are risking their domestic supply base. Similar to what we have seen in dairy, with longer-term contracts that take account of costs of production, there is quite a bit of opportunity to look at how the supply chain can take an integrated approach to look at deals that last a number of years. I am conscious that Warburtons, for instance, has recently announced it has a five-year deal with sourcing its bread. I know that some of our big brewers in the past have had two-year deals on malting barley. Looking at stuff that starts to have more of a long-term indication about what income flows might be is a big positive. As I say, those examples are probably few and far between. You start to take a big step forward if you see that in the red meat supply chain. Tesco has recently started talking about contracts for its lamb supply. As a sheep producer, I am sure that having an indication of what the lamb price might be in 12 months’ time would be invaluable towards planning businesses. Viscount Hanworth: Can you say a little more about the globalisation of farm prices? Is that something that is proceeding and is it the same in all sectors? Presumably milk prices are local, but other prices are utterly globalised. Paul Wilson: I do not think we could characterise milk prices as local. While we have a liquid milk supply that is a perishable product, there is not very far that you can move it before it is unfit for human consumption. The actual milk price is determined on a global market. There are not that many sectors that I could think of where I would say, “Actually, this is a very local market”. The local market opportunities for farmers come from when they start to add value on their farm or to link in with a branded product. Picking up on the points that Philip mentioned, in developing those collaborative arrangements with retailers, a lot of those will have to come forward. The fact they have happened in milk is not because supermarkets wanted to have them; it is because they realised there was a crisis in the dairy sector and they needed this perishable product on their shelves to get customers in. That is where those came about. For the UK farming sector to benefit from those verticallyintegrated supply chains—and I am in favour of looking at how we could develop more of

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) those—they need to be given some brand recognition. If they are still just producing a commodity, they are open to the vagaries of a world market within some of those production contracts that exist. Viscount Hanworth: It was either you or Philip Bicknell who said that these long-term contracts have been favourable, but can we trust that they always will be favourable, or might they not redound to the huge disadvantage of breeders at some stage? Paul Wilson: By their very nature, they remove volatility with respect to input and output price variation. As Philip mentioned, when the input prices come down farmers will receive a lower output price, but when those input prices rise those farmers will be receiving a higher price for their output. It removes some of the volatility in the dynamic input/output systems that we observe in normal practice. In the longer term, they do introduce the potential for some moral hazard, as it might be termed, with respect to monitoring the costs of production on a set of farmers who supply a particular retailer, because it may not then enhance innovation, for example. The farmers might think, “I have this price. If we are all working together and we are all doing things in a similar way, we can track our prices”. There is a potential for innovation to be lowered because of those vertically-integrated factors. That will not necessarily happen in reality because it is still a competitive market with the different retailers competing against each other, so they will still be looking for their farmers to continue to innovate and continue to drive down costs. Viscount Hanworth: But there is a potential for farmers to be squeezed, or, to use a cruder word, screwed by— Paul Wilson: There is always a potential for those producers in a perfectly competitive market, which farmers are. There are a lot of small businesses operating within a market, and at either end of them they have a small number of purchasers for their products, a small number of suppliers of their inputs, and they are effectively small businesses within this quite compressed chain; you are right. The Chairman: We will take Lord Rooker next, because we must move on to Lord Selkirk’s question in a moment. Q18 Lord Rooker: We heard last week that the UK is unique in Europe in that 40% of food is sold on promotion. If this is the case, the consequences of selling your soul for five years to the supermarkets—which are then doing the promotions in a way that nobody else in Europe has done—is that they end up deciding everything that happens on the farm, including the price. There is a big risk there. Do you have a view as to why we are unique in

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) the rest of Europe in that 40% of our food is sold on promotion, or is that something that is further up the chain than you would have knowledge of? Philip Bicknell: It is fair to say when you look in some parts of Europe that you have perhaps the discounters that are grabbing the headlines here and making inroads into the UK market. Between them, Aldi and Lidl now have over 10% of the market share. In other European countries they have already had a relative lead market share, so you already have some relatively everyday low pricing strategies that they employ; it is less about promotion and more part of their business strategy, and has been. The argument that we were talking about, from the weakness or relative strength, is in itself an argument for why we need cooperation. It is part of the reason we need the Groceries Code Adjudicator, who I think has started to have an impact. The remit of the GCA is not about prices but about contracts and how they are honoured and how suppliers are treated. Trying to make farmers and direct suppliers pay for promotions is something that the code looks at. The one aspect that might start to make a difference, and I know it has traction again from a European perspective, is asking whether something like we have with the Groceries Supply Code of Practice in the UK might make a difference at a European level as to how retailers treat their suppliers. For me, the challenge is about trying to iron out those peaks and troughs. I do not want us to be an industry that goes from boom to bust on a fairly regular basis because I do not think that is healthy. Long-term contracts will not be for everyone. There will be some who want to ride that rollercoaster and some who want to look at the market and take different strategies, but we need to have increased options, because at the moment, in a number of sectors, we have no choice but to ride that rollercoaster. Ross Murray: I very much agree with what Philip has said about the supermarkets. They are so powerful and sophisticated in both their selling out to the general public of the food product and their purchasing of commodity from the farmers; but the alternative to long-term contracts is for me to fill my trailer every Wednesday and go to Abergavenny market and take a price. Increasingly, that is looking old-fashioned. Q19 Lord Selkirk of Douglas: Chairman, my question splits into three parts. In very large measure you have already answered the first, but, for the sake of clarity, I would like to try to clarify the role of public policy, including the CAP, in mitigating the effects of price volatility. Do you feel that public policy provides sufficient risk management tools and opportunities for farmers within the United Kingdom, and does EU and UK public policy

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) improve or exacerbate the negative effects of price volatility on farmers? As I have said, in large measure you have answered this because you have made it very clear that farmers respond to market swings, but can you add any points you wish to make? Ross Murray: The principal hedge against volatility through public policy is the Pillar 1 payment. We as farmers should be very grateful for that. What it is used for should be demonstrated. We would certainly look at the system of the Common Agricultural Policy in a very positive way. It has smoothed out some of these huge swings in price and profitability. I take a positive view towards it. I do not resile from the fact that it cannot adapt and has to change. and it has to be justified, but, for the most part, the Pillar 1 payment is incredibly important. Paul Wilson: Here, in 2015, we are talking about the Common Agricultural Policy, but we need to go back to the 1930s to understand the context of why we have an agricultural policy that came, in part, because of the great depression, the Agricultural Marketing Acts that came in in the 1930s, and the consequent recognition that farming faced these volatile prices. The underlying factors still remain. We have variable production because of the climate; we have variable prices, partly because of global markets but also because of the price-inelastic nature of food products. Consumers need to eat on a weekly basis, and, while retailers compete for individual consumers, when it comes to the price-responsiveness of those consumers to individual prices, combining that with the relatively volatile nature of production means that volatility in agricultural prices is inherently a factor of farming. The policy of those marketing boards that came in in the 1930s, and then subsequent variations of agricultural policy, is how we have got to where we are today. There was that recognition that, without some form of policy intervention, we would see farmers going bankrupt and there was land abandonment, as in the 1930s, for example. That historical context is possibly useful to recall because that is why we have a Common Agricultural Policy today. Q20 Lord Selkirk of Douglas: Thank you. May I go on to the second part of my question, which again you have very largely answered, about devolved Administrations and how the policies differ? If I may take an example, when the Chernobyl disaster happened and protective measures had to be put in place, they were similar, I imagine, throughout the United Kingdom. Now, with devolved Administrations, is there sufficient liaison between them when action and contact is needed, discussions should be followed up and put in place, or do you feel there are still improvements to be made in that area?

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Ross Murray: I have no reason to think that there is not very good liaison between the devolved nations. There are clearly differences of opinion. Philip Bicknell: Some of the frustrations come from the points that we mentioned before about the different levels of payments and the fact that, from an England perspective, we have gone further and faster to that flat-rate payment than not just other parts of the UK but other parts of Europe. That general approach of implementing rules and regulations further and faster—earlier than other parts of Europe—can be damaging. The best example of that is the UK pig industry in the 1990s and the stall and tether ban, where we implemented that 12 or 13 years ahead of other European countries. That regulatory framework started to have an impact. The net result was that we lost a big proportion of our breeding sows and our pig industry, coupled with the fact that, I think, Danish producers had access to five-year tax averaging at that time, which started to have an impact on their views of being able to manage volatility. I am pleased that the Chancellor has recognised that five-year tax averaging is something that needs to be extended to farmers here in the UK. Lord Selkirk of Douglas: If policies between devolved Administrations vary somewhat, this is not a particular problem that you are concerned about. Is that roughly your position? Philip Bicknell: When you start thinking about some of the coupled support payments that offer additional funds on a per-head basis to livestock farmers in other parts of the country, that puts them at an advantage compared with us, but that is something that is taken by those devolved Administrations. Q21 Lord Selkirk of Douglas: May I ask the last part of my question, which is what is the role of financial instruments? Are they being used sufficiently, and should the European Investment Bank play a larger role in supporting on-farm risk management efforts? Paul Wilson: It depends how we define financial instruments. As to farmers having the ability to sell their products forward, as Philip mentioned, before they even sow them, in terms of forward contracts and options—and those exist—some farmers use those. Typically, those are larger farmers—those who are more informed about the market and those who are less able to take risks, be it because they are tenanted or they are a manager operating a farm for a company, for example. But even the use of some of those financial instruments around sectors where forward contracts and market opportunities exist bring risks. For example, in 2012, when we had a very wet summer and low production levels in cereals, some farmers had committed a certain percentage of their crop on a forward contract and failed to meet the tonnage that they had agreed to sell within those contracts

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) simply because of the variable nature of production. When you are using those financial instruments that exist, you need to be aware of the scope you can use them for, because if you use them to a fuller extent you may be exposing yourself to a greater degree of risk in your business. Some of those things are important to understand, as well as the fact that some of those financial instruments are restricted to a subset of sectors. If I may carry on, with respect to aspects of the European Investment Bank, typically, farming is well supported by the UK banks because farmers have a good track record of repaying loans on investment. Inevitably, there is a small proportion of farmers who do not repay their loans, but, generally speaking, the UK financial sector has been willing to support agriculture, largely, as Ross mentioned, because a lot of those businesses are sitting on a large asset—that is, their land. The Chairman: While you are dealing with this, could you touch on the risk management measures that are available under Pillar 2, which the UK has not taken up? Philip Bicknell: As to the European Investment Bank, I understand that the Commission and the EIB are looking at volatility-proof loans for the dairy sector, in effect acting as an idea of guaranteeing loans. I am not sure how that would work in combination with banks and what their appetite for it would be, but the information that I have is that interest rates would be low and loans could last up to 15 years. You could take payment holidays at periods of low prices, which is something that the banks offer anyway; they tend to be fairly pragmatic as to cash-flow repayments. There is perhaps scope there. It is something that has been looked at with dairy and it could be extended to wider sectors. As to futures, yes, the ability to give an indication of price, whether or not I use futures, is great. I would like to see that extended to other sectors, but I am conscious that for everyone who wants to sell on futures you also need a buyer. I am not so sure there is the amount of buyers out there for some of the products that we produce. In terms of the second pillar and some of those income support measures, I am trying to rack my brains and think back, going back a little while to the early days of the current CAP deal. There is a mechanism whereby, if farm incomes fall by more than 30% year on year, you can make additional payments. However, from my understanding of that, first you need the data. How do you verify why income has fallen? Is it in relation to a crisis? Is it the supply side? Is it price-driven, or is it something that the farmer has done? How do you get the paperwork to do that? What would be the process? What would be the timeframe involved for doing that? Throughout those early discussions, it always felt to me that it is the kind of

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) thing that would come long after the crisis. The idea of getting support here and now is great, but I do not want it in 18 months’ time. The one thing that BPS, the basic payment under CAP, does—assuming that payments are made on time, and I am conscious that that is a question mark right now, but a proportion of members have been paid—is to provide a revenue stream. Typically, farming businesses after 2006 have got used to that revenue stream hitting their bank accounts in, hopefully, December and January for the main part. Ross Murray: As to your question about specific risk management tools, Pillar 2 allows insurance products. This is widely taken up by continental countries but has not been in this country. It is something that possibly we should look at, if this volatility remains the pattern—some form of insurance scheme. There is a very sophisticated model in America that has been long-standing. There will be a reluctance by the public to be seen to be subsidising the insurance industry. It is not without its difficulties, but insurance is possibly a way ahead in the future. Q22 Viscount Hanworth: I am conscious that most of my assigned questions have already been asked, but perhaps there is no harm in reiterating them in case there is something more to be said. First, there was a set of questions about how farmers could protect themselves against volatility, either by diversifying production or production flexibility. We have already been told that many farmers are looking for other enterprises that they can use to tide themselves over. Maybe there is something more to be said about that. Essentially, are these recourses equally available to large and small farmers? That is one question that could be answered. That is the first set. Ross Murray: Yes, I think they are. The tourist sector is a wonderfully developed thing; it is one of the glories of Britain and it happens countrywide. It is not restricted to any particular type or size of farm. Paul Wilson: Some of those diversified options—for example, tourism—in certain parts of the country work well; in other parts of the country, where there is less tourism interest, where they typically are the more densely-populated areas where there might be more businesses, renting out of farm buildings for something that is non-agricultural can also work well. There is a range of diversified activities that farmers are taking part in. In response to the question that was sent in advance about conventional methods, we have seen, particularly since the 1960s, an increased specialisation of farms where, typically, a mixed farm might have had a range of agricultural enterprises, and, over time, those have become fewer and fewer, and farms are now much more specialised. It has allowed them to

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) produce at lower costs of production per unit of output, but with that specialisation has come the trade-off that they are effectively more exposed to the price volatility in any single market and the options of diversifying help to counteract that. Certainly, specialisation is something that has not just occurred in the UK; it is a developed world agricultural scenario. Philip Bicknell: Prices in a lot of areas are low at the moment, so, in effect, if you are a mixed farm, you are carrying the low prices of cereals and from a livestock perspective. When we did our most recent confidence survey, mixed farms tended to have among the lowest levels of confidence when looking at the next 12 months. As to diversification, the one thing in itself can have a degree of volatility and uncertainty. The seasonality that is inherent in tourism and some of the challenges that you could have around trying to add value to your farm produce or retailing it yourself can all prove a bit of a distraction from the day job. We talk a lot about prices, but another area that, as an industry, we can focus on, as well as focusing on that profitability, is to make sure that we are focusing on the cost side. There is also an argument for making sure that the farm business side is not losing out as a result of looking at other revenue streams. Ross Murray: I would agree with that, yes. It requires a different set of business skills. Viscount Hanworth: Am I correct in understanding that productive flexibility is now somewhat at a discount because of the nature of modern farming technology, which essentially drives one towards specialisation? Paul Wilson: Could you repeat that? Viscount Hanworth: I am sorry; that is a complicated set of words. Am I right in understanding that productive flexibility—in other words, switching from one crop to another or one output to another—is now somewhat at a discount because of the nature of modern technology that locks farmers into certain specialisations? Paul Wilson: I would agree with that. With this increased specialisation has come an increased need for mechanisation, specific buildings, specific management practices or specific skills that are needed in any one sector, and that has grown over time. The ability to jump in and out of a sector, as used to occur quite frequently, has diminished quite considerably. Philip Bicknell: You have seen changes in the crop rotation and the mix that people have on a farm, but then we have the crop diversification rule as part of CAP, which perhaps goes against us responding to some of the market signals by putting in place the fact that we have to grow three crops in a certain area.

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Viscount Hanworth: What kind of financial measures are available to enable farmers to address this volatility? That has, in some sense, been answered, but I have two riders. First, are banks equally amenable to giving overdrafts to large and small farmers, or are small farmers, who I presume are also preponderantly tenant farmers, disadvantaged by the banks? Do I understand that this rent ratchet, as one might call it, is working substantially to their disadvantage? Philip Bicknell: If you speak to the banks, they will tell you that they will treat a business based on its profitability going forward. They will say that it is about the underlying profitability of the business, whether it is an owner-occupier or a tenanted farm business. What is certain is that banks have lent more money to farmers. The borrowing to agriculture is £17.5 billion, 10% up on where it was 12 months ago, and has followed something of a steep incline. My view is that that has been driven by cash-flow requirements. The tendency has been, from a farm perspective, to try and extend the overdraft to get over that cash-flow hurdle, but where you have probably seen a bit more interest from the banks is in trying to get people into longer-term loans or mortgages—the more structured side of things. That is where tenants can have a bit of a disadvantage in terms of having the asset base to borrow against. Viscount Hanworth: We have the sense that the wise bank manager has been replaced by algorithmic decision-making. Are there complaints from farmers in that connection, that it is simply checklists that lie behind their credit rating assessment rather than a detailed and knowledgeable assessment? Philip Bicknell: There has been a change, and something we have tried to get across to our members is that, if you are going to go and talk to the bank, make sure you have done your homework, do the business planning, look at sensitivity analysis and at how you are going to pay that borrowing back. The idea of phoning and asking for an extension of the overdraft is something that is in the past. Hopefully, as an industry, we should be getting more used to providing the information and making our case. I worry about the proportion of farmers who perhaps do not go and talk to their bank, who will batten down the hatches. I am particularly thinking about some of our smaller livestock sectors, who will perhaps make changes to their business without going to the bank because they have a view that they might not get the level of support they need. Viscount Hanworth: Can I pursue another tack, or are we running out of time?

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) The Chairman: We are almost running out of time, but do put it. Could I ask our witnesses to be fairly brief, please? Viscount Hanworth: As a child, I was aware of slogans like “Go to work on an egg”, “Drinka pinta milka day”, and so on. Those slogans spoke of the marketing boards. What has happened to them? Is there any possibility of reviving those sorts of arrangements that I think somebody said dated from the 1930s? Would there be an advantage in re-establishing them and pursuing some of their functions? Paul Wilson: My understanding of the marketing boards is that the European rules do not allow us to have them and that is why they were disbanded. I may be wrong in that assumption, but that was my understanding. As a quick follow-up, part of the question related to advertising. There is quite strong evidence that, in a country where you suck in imports, generic advertising is a waste of money. If you are going to advertise, you need to advertise on a brand, and advertising generically is a waste of farmers’ money. Philip Bicknell: We have the levy boards. Collectively, they gather revenue from all farmers. I think they have a budget of over £60 million, and a proportion of that will go into market development activity. Some of that is targeted promotion, but it has to be about more than consumer promotion. It has to pick up international trade development; it has to be perhaps a bit wider than just consumer promotion. From my perspective, we started to see it in sectors like potatoes where we have branded products on a shelf that we did not have 10 years ago. We have seen some of our biggest dairies, including Arla, the largest farming co-operative in the UK, I think I am right in saying, ploughing quite a bit of money into TV advertising and getting farmers out on the streets to engage with consumers this side of Christmas as well. There are some initiatives, but I want to see others in the supply chain taking them, not just farmers. Lord Curry of Kirkharle: In the interests of time—we have pretty well covered the futures market, private sector partnerships and supply-chain integration—I will make one comment following Professor Wilson’s comment that fixed prices within supply chains may stifle or discourage innovation. The assumption is that low prices are going to encourage innovation, although I think that is a matter for debate. Paul Wilson: I agree. Lord Curry of Kirkharle: In the supply chain with which I am most familiar, which is the Waitrose milk supply chain, in fact the reverse is true, because the deal is that, if we pay you

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) that price, you will then adopt innovative measures and share those measures across the supply chain, and that is incumbent on those participants. The area I want to explore a bit more is this whole issue of productivity, which you mentioned, Phil, and the role that innovation and the adoption of new technology and knowledge transfer, et cetera, can help in improving our position against this background of volatility. I am keen to hear a bit more about that. Paul Wilson: The aspect of continual innovation is going to be necessary to drive down costs to compete globally and for farmers to compete against each other; so anything bringing innovative practices forward is a good idea. Farmers are up for taking up new technologies and new innovations where they see those having a particular driver that reduces costs— particularly labour-saving activities, for example. Things like precision agriculture have become more and more common in the arable sector, partly because there was that price spike that allowed people to reinvest but also because they see that as a way of driving down costs and driving up productivity. The innovation is in two main forms for me. One is the productive aspects of innovation, but the other side of the innovation is better management on farms. A key determining factor of farm performance is the management ability of those individual farm businesses. Anything that allows farmers to access greater information—for example, benchmarking, which we do within the Farm Business Survey—or allows them to look at their costs and revenue moving forward, which again we do with our work on our Projection Calculator tool, or which allows people to go in and test different price scenarios for their production: all those things need to marry together with the innovative practices at production level to achieve a successful business. Ross Murray: We should remind ourselves that we have some world-class research facilities in Britain. Just picking two, Rothamsted in Cambridgeshire and IBERS in Ceredigion are world-class facilities, and they need to be funded and supported, and the results of their research promulgated into British agriculture. Philip Bicknell: The point I would make is about trying to join it up exactly. Some of the research that might have happened over the last 20 years has taken place in an academic environment and we perhaps have not shared the lessons learnt and had that knowledge transfer into industry. As much as I agree with Paul about the rapid uptake of precision agriculture, which has surprised me over the last 10 years, if I am honest, one factor behind that has been about annual investment allowance. To what extent have the incentives from a taxation perspective helped encourage some of that uptake in plant and machinery? In terms

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) of innovation, it is also thinking about what makes us more resilient. On the back of the flooding in Cumbria—which I am conscious is the latest in a number of extreme weather events that we have had in the UK, whether that was the drought we saw in 2011 and early 2012, followed by an awful lot of rain that made 2012 in England the wettest year on record—do we have the right kinds of crops and plants that are water-resistant or droughtresistant? Do we have the right sort of investment happening in drainage to make sure that we have the right productive capacity? That whole area of innovation is something that, as an industry, everybody is increasingly focused on. We also need the right sorts of information, but, critically, that needs to get down to farmers and needs to inform decisions that they take on the farm. Lord Curry of Kirkharle: Despite having these world-class centres—and you are absolutely right that we have—the fact is that we have lost ground in productivity, so we are not connecting well enough somewhere between the research that is being funded and its application on the farm. In the EU reform package deal, member states are able to introduce a farm advisory service. Defra’s definition of that is to advise on the implication of the CAP reform package, when, in fact, should it not be linked to this whole issue of innovation and productivity? Paul Wilson: It would be great to see an agricultural advisory service. I just do not see the current Administration— Lord Curry of Kirkharle: I am not suggesting we should try and reinvent ADAS, but— Paul Wilson: To be fair, from a university perspective, I am well aware that the drive now is around the impact of research. It is a great thing, from my point of view, that we do research and have to translate that to the sector where it is needed. From our perspective, getting those agricultural innovations that we do in a research-led university like Nottingham through to farming is a good thing. It incentivises us to do that and we are all up for it. Philip Bicknell: There is a role for the public sector in it but I am conscious of some of the positives that have come out of those integrated supply chains, whether that is Tesco working closely on the dairy side with Liverpool vet school or whether it is facilitating benchmarking in some of those supply groups. That partnership or joined-up approach also starts to have benefits other than price. The Chairman: I am sorry to have to bring this to a close now, but Baroness Sheehan can ask one question.

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Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Q23 Baroness Sheehan: In terms of risk mitigations and all the other information that you have to help farmers over price volatility, et cetera, what mechanisms do you have to disseminate this information to your farmers and members? I know you have emails, but do you use any other means—social media? Philip Bicknell: From an NFU perspective, we are trying to get information on a whole host of issues that we are working on. In terms of how we communicate with our members, the website has been mentioned, but there are also Twitter and Facebook. The thing that still gets most read is our British Farmer & Grower magazine, which goes out 12 times a year. We have a range of different mechanisms, and of course we also have 36 county advisers across the UK and branch meetings. That physical face-to-face meeting is still strong. As to our role, we need to be an advocate for some of these things, but with some of the detail it is about how we get the levy boards more involved in some of the innovation exchange. For me, a big enabler, particularly when we are talking about better information, still comes about via the internet and broadband access. We think of broadband access as being a rural issue and a big challenge from a farming perspective in remote rural areas, but I know plenty of members who are perhaps on the edge of a town, who, because they are at the end of the line, are well down the priority list for any sort of upgrade. Yes, it is a big rural issue, but it impacts those farmers in parts of the country that you perhaps would not expect. For me, it is a big enabler to getting the information, which then helps them approach business differently. Ross Murray: But there is no substitute for putting the wellies on, getting on a farm and discussing it with fellow farmers. That is so often the best way of doing it. The Chairman: We really must call this session to a conclusion, so be very quick, please, because we have to finish. Viscount Hanworth: Regarding my request for a note on statistical sources—and I think it is addressed to Professor Paul Wilson—the recipient might be Mark Gladwell, who could then circulate us; otherwise shall I pass you an email address? Paul Wilson: I will liaise with Patrick. The Chairman: Thank you very much, gentlemen, for your evidence and time. It is clear that we could have carried on, but we do have another session. Thank you on behalf of the Committee for coming and, as I say, giving your time and answering all our questions. I also wish you a very happy Christmas and a good new year. Thank you.

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CRM Commodities — Written Evidence

CRM Commodities — Written Evidence Introduction This submission of evidence is written based on my experience as both consultant, advising and educating UK farmers on managing grain marketing volatility, as well as Director of CRM AgriCommodities which works with UK farmers as consultant on grain marketing over 50,000 hectares of combinable crop production. Personal experiences regarding the current level of response to the price volatility by farmers in the UK have made it apparent that there is very low level of understanding within the agricultural sector in the UK, particularly on a farmer level, of the drivers and the impacts of price volatility on farm business profitability as well as the various tools which are available to manage these. The primary issues which address a number of the questions raised by this call for evidence are therefore in my opinion: 1. Education – How can we improve the lack of understanding of markets and tools? 2. Access to risk management tools – How can the costs and cash flow impacts of these tools be reduced? 3. Availability of risk management tools for farmer use – Are the tools suitable for use by farmers as opposed to financial institutions? 4. Regulation – what can the regulators do to make risk management tools more accessible to farmers? 1.Education There are many ways in which farmers are able to manage risk and many of these methods are used by farmers around the world where we have regular contact with providers of risk management advice, many of whom have stated their surprise at how immature the application of such practices is within the UK market. Tools such as options, futures, swap contracts, OTC derivatives are all available to help farmers hedge the price risk of what they produce or purchase. Having provided training to hundreds of British farmers, the issue has become clear, a lack of understanding of the tools available for farmers to manage risk and therefore, a lack of confidence in using them. However, there are a number of ways in which these tools can be tailored for use by the relatively inexperienced UK market. A number of these tools can be accessed through the physical trade where they are usually more expensive than those which can be bought on a regulated exchange, as well as being less liquid (unable to be bought and sold as freely), they also carry increased counterparty risk which many farmers are nervous about following corporate bankruptcies of the providers of such tools on rare occasions in the past, these act as deterrents to those interested in using them. In my opinion, there is therefore a lot more which public policy could be doing to encourage and incentivise education programmes for price risk management into volatility. Over the past decade, volatility has become the most significant variable to the profitability of farm businesses and therefore it is in the interests of the majority of the industry to understand and actively manage the risks which it presents. 97 of 373

CRM Commodities — Written Evidence 2. Access to tools As previously mentioned, there are a number of tools available to aid farmers looking to manage volatility, other than a lack of understanding, another major barrier to successful management is the access to suitable marketing tools, some of these tools are outlined below including their benefits and restrictions: Futures - these markets allow both buyers and sellers of physical commodities to fix a price when there is either no price or a poor price available on the physical market, these markets also allow farmers to manage risk on more liquid international which may be more suitable and efficient. There are however elements which may deter farmers from using futures: 

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Cash flow risk – despite futures markets providing useful hedging tools, they do expose users to margin calls and therefore the potential for extra cash flow demands between the hedge being place and the physical being sold, this can be a deterrent for farmers looking to hedge when cash flow for many farming businesses across Europe are already tight. Around the world, this issue has been addressed by the banks who provide ‘swaps’ to farmers where the farmers bank will take on this cash-flow risk on behalf of the farmers until the physical grain is sold – I am not aware of banks in the UK who provide this service due to the regulatory restrictions currently in place and the relative size of agriculture to the banking sector – this is one issue which if addressed could make risk management tools far more accessible to UK farmers. Currency risk – when exposed to a foreign market, a business exposes it self to the currency of that market. It is possible for a business to hedge this currency risk however, it adds to the complexity of the trade and as previously stated the issue still remains both understanding and cash flow risk – Having spoken to advisors in different countries, it is apparent that the banks in those countries have provided products which remove both the currency risk and cash flow risk which a business may face when managing risk.

It must be noted that there are very few retail banks in the UK who provide these sorts of services to their agricultural clients, those which do have unrealistic criteria which a farming client must meet (such as asset value, number of employees, previous trading experience) in order to use these facilities, these are due to the regulatory requirements placed upon the banks. This raises the questions: what can the regulators do in order to create a more accessible market for the ‘average’ farming business? Options – can be used as very powerful risk management tools again the problem is the lack of understanding of those tools which are available and their accessibility, often tools which would be available to farmers (Over the counter) are considered expensive and can carry level of default risk from the seller, which has lead to a negative opinion of such tools throughout the industry. The same products are available on regulated exchanges however due to the regulation there are very few brokers that will open accounts to allow farmers to trade such tools as ‘retail clients’ – some do and often demand large sums upfront as deposit before farmers can begin trading (£10,000 - £50,000), which are often unrealistic for the ‘average’ farmer, especially when cash flows are already tight.

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CRM Commodities — Written Evidence Other tools, such as marketing pools also exist which provide risk management to farmers, there are many who do not use these due to a lack of transparency and conflicts of interest, choosing to take on the risk themselves. 3. What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation? There is information available online which is designed to educate farmers however, much of the feedback we have received suggests that this is rather complex and only a limited amount can be learnt from reading documents, this deters farmers from using these instruments. The solution requires continuous training and advice, not only because markets are constantly changing and therefore the tools which are suitable are very much market dependent, but also because it is not a one-stop process to generate the knowledge, skills and level of confidence which farmers require to manage risk effectively using all available tools. Policy and funding can encourage farmers to acquire these skills, but our experience has been that this rural funding has been hard to acquire particularly in recent years and therefore many farmers continue to use relatively primitive forms of marketing without fully embracing what is on offer. Governments could also look into providing ‘education credits’ to farmers encouraging them to take on ongoing education programs on this topic as part of the Common Agricultural Policy Conclusions The key factors which have been outlined that restrict the management of risk within the agricultural industry, particularly on a farmer level include: 1. A lack of understanding and– This is particularly evident when you look at how much more advance the trading techniques of farmers in other major producing regions of the world are when compared to those of UK farmers. 2. Barriers to access of various tools – Cash flow, currency, cost, regulation. 3. Regulation of the financial industry which makes it expensive for banks, brokers and other financial institutions to create products and provide access for UK farmers. 4. Funding – Providers of funding need to understand the importance of price risk management to the industry and therefore provide access to funding more freely on this topic. It has never been more important for farmers to be managing market risk! We have noticed growing awareness of price risk management advice but we are still a long way behind other countries, it requires a change of culture and attitude by all areas of the industry if we are to begin to adopt risk management on an industry level and government and policy need to play a key role in this change. Despite vast increases in volatility and market drivers there has been little change to the marketing techniques of many farmers, volatile markets require more advanced marketing (risk management) strategies if farmers are to ‘mitigate the adverse effects of price volatility.’ 31 December 2015 99 of 373

Dairy UK — Written Evidence

Dairy UK — Written Evidence Executive Summary Dairy UK is the trade association for the British dairy supply chain. Although the current situation in the dairy sector is extremely difficult, long term growth prospects for the sector are universally acknowledged to be positive. The Government has a role to play in developing industry resilience by working to improve industry competitiveness through; 

Promoting dairy products

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Supporting exports

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Facilitating the development of dairy futures markets

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Minimising regulatory burdens

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Ensuring competitive energy costs

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Re-examining public procurement rules

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Giving greater emphasis to Rural Development programmes focused on competitiveness

A variety of initiatives are being undertaken, both by the industry collectively, and by individual enterprises, to improve resilience. UK dairy processors are also pursuing a range of strategies to increase the overall value captured and passed back down the supply chain. Whilst not a panacea, futures can play a role in mitigating the impact of price volatility on dairy farmers. The EU can play a role in facilitating the development of futures through the provision of market data and support for education and training. Until such time as futures develop then the EU should provide an effective safety net. The possibilities afforded by the EIB initiative and the USA’s Margin Protection Programme should be examined. The main cause of the current price reduction in the UK is the global over supply of milk. Surplus milk is processed into commodity products and prices for these products have slumped. There is a multiplicity of mechanisms by which trends in dairy commodity markets affect returns from fresh product markets. Over a longer time frame the underlying root cause of price volatility in the dairy sector is the absence of meaningful differentiation of raw milk so volatility is inherent to the product (raw milk) that dairy farmers produce.

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Dairy UK — Written Evidence Dairy processors, whether co-operatives or private, do not have the resources to protect their supplying farmers from price fluctuations and variations in national industry structure do not protect dairy farmers from price volatility. Dairy UK Dairy UK is the trade association for the British dairy supply chain. It brings together processors, dairy co-operatives, manufacturers, farmers and bottle milk buyers throughout the United Kingdom. To respond to the numerous questions raised by the Committee, this submission looks at: 

long term demand prospects

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priorities for UK Government action to improve resilience

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initiatives by the industry to improve resilience

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strategies being pursued by dairy processors to increase the value in the supply chain

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the role futures instruments could play in mitigating the impact of volatility

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the case for the European Union to have a residual role in market management

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additional policy initiatives that should be examined

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the origins of price volatility in the dairy sector

Demand Prospects Although the current situation in the dairy sector is extremely difficult, long term growth prospects for the sector are universally acknowledged to be positive. The drivers of global growth remain in place: population growth, rising income and changes in dietary preferences. The European Commission’s ‘Prospects for EU Agricultural Markets and Income 2015 – 2025’, published in December 2015 forecasts world consumption (and production) of dairy products to keep growing at a rate of 1.9% per year. The same report forecasts underlying price trends to be positive. Until 2020, the average EU milk price is expected to oscillate between 32 ct/kg and 33 ct/kg. After 2021, the milk price is expected to increase. However, around these underlying trends, prices are expected to remain volatile. Resilience Government Policy Within a volatile price environment the Government has a role to play in assisting the development of dairy sector resilience primarily through working to improve competitiveness, which would allow it to be more profitable at any given level of price. Longer term measures that the Government can take to improve competitiveness also include:

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Dairy UK — Written Evidence 

Promoting dairy products: The messaging from the Department of Health needs to endorse the positive health benefits of dairy consumption. Against scientific advice the Public Health England campaign to reduce consumption of added sugar alerts consumers to naturally occurring sugar in dairy products giving an entirely false impression of the nature of dairy foods. Defra needs to support industry efforts to undertake generic promotion of dairy products.

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Supporting exports: The Governments needs to do more to get the EU to open up export markets and negotiate effective Free Trade Agreements for markets relevant to dairy exports. UK procedures for issuing export health certificates need to be streamlined and improved through investment in administrative processes.

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Facilitating the development of dairy futures markets: The UK should encourage the EU to improve the quality of market data which would help to facilitate the development of futures markets.

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Minimising regulatory burdens: Particularly for planning laws to cater for sector restructuring and in the implementation of the CAP.

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Ensuring competitive energy costs: Climate Change Agreements operated through DECC are an excellent solution to the dairy industry’s contribution towards meeting UK Carbon Budgets through improving energy efficiency, without jeopardising the industry’s competitiveness. The rebates from the Climate Change Levy made available under CCAs are a form of public expenditure and there is pressure for their discontinuation which would result in significant additional costs to the industry.

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Re-examining public procurement rules: The benefits of sourcing sustainably produced UK product needs to be acknowledged.

The UK Government needs to use the discretion allowed under the Common Agricultural Policy to give more emphasis to initiatives such as those falling under the Rural Development Regulation headings of Investments in Physical Assets; Knowledge Transfer and Information Actions; Advisory Services, Farm Management and Farm Relief Services; Farm and Business Development. In particular initiatives that address endemic diseases would be welcome. Industry Initiatives to Improve Resilience The primary responsibility for developing resilience in the dairy sector rests with the sector itself. A variety of initiatives are being examined and developed, both by the industry collectively, and by its individual enterprises. These include: 

Benchmarking; this helps to improve cost efficiency and overall competitiveness.

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Integrating the assumption of price volatility into operating assumptions; this should lead to tighter cash flow management and phasing of investment.

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Adopting lower cost production models; in dairy farming this primarily consists of moving towards block spring or autumn calving systems.

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Developing opportunities for differentiating raw milk; this will reduce exposure to price volatility by segmenting the market for raw milk. 102 of 373

Dairy UK — Written Evidence 

Greater investment in training and personal development: this will improve the sector’s skill base.

Key to achieving resilience will be the understanding and support from the banking sector. Banks need to recognise that the dairy sector now shares the price volatility traditionally seen in other sectors and consequently the viability of dairy enterprises has to be assessed over the entirety of the price cycle. Both Government and the dairy sector also need to foster an optimistic mindset to engender a confident proactive attitude towards the future which in turn will encourage long term business planning. Industry Strategies to Increase Value in the Supply Chain Whilst changes in industry structure cannot protect the industry from volatility per se, (see paragraphs 50 below), it can impact on the overall average price farmers receive in the long term over the course of the price cycle by providing a premium over the returns farmers would receive from selling directly into commodity markets. Both co-operatives and private dairy companies in UK are pursuing strategies to increase the value captured and passed back down the supply chain. These include; 

Greater efficiency; to maintain cost competitiveness.

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Consolidation; to mobilise more resources to invest in brands and new plant.

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Investment in product differentiation; through innovation, product development and marketing of brands.

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Supply chain co-operation; to improve the communication of commercial information through the supply chain and to exploit opportunities for collaboration.

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Developing export markets: This opportunity is not commercially feasible for the liquid milk industry. For processors in value added markets this will create more opportunities to maximise income whilst also increasing negotiating leverage with domestic customers. However processors in commodity markets will be exposed directly to world market price volatility.

Where possible Government policy should facilitate the delivery of these strategies. Futures Instruments The dairy sector does not have the means at its disposal to reduce price volatility. However, there are options open to it that can mitigate the impact of price volatility on farmers. This is principally through the use of futures instruments. Whilst not a panacea, futures contracts for dairy can play a role in mitigating the impact of price volatility on dairy farmers. A developed futures market for dairy would enable some dairy farmers to manage price risk by allowing them to fix in advance some or all of their income. When used in conjunction with futures contracts covering farm inputs (wheat etc), dairy farmers would be able to fix their margins.

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Dairy UK — Written Evidence Dairy futures would also assist the industry in the marketing of dairy products. By enabling the industry’s customers to fix input prices they would help the dairy industry to compete with substitute products. The successful use of dairy futures in the USA provides American dairy farmers and exporters with a competitive advantage over their EU counterparts which will increase if the TTIP negotiations are brought to a successful conclusion. Challenges in the Development of Dairy Futures Markets There are significant challenges in achieving an alignment between futures contracts and the actual commodities traded by dairy processors and the price paid to farmers for raw milk. However this challenge can be overcome through a variety of mechanisms, including: 

A+B milk pricing mechanisms, where the B price is linked to the commodities traded on the futures exchange,

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Development of futures contracts for raw milk,

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Creation of risk management instruments based around a basket of commodities.

The second major challenge is generating greater liquidity in dairy futures markets. For dairy futures markets to develop further in the EU there needs to be greater participation by the supply side of the dairy industry, i.e.; dairy farmers. This can be addressed through aggregating producer requirements for futures contracts through intermediaries, such as dairy co-ops, milk purchasers or producer organisations. An additional complication for the UK dairy industry is that the futures contracts for dairy products offered by EEX, which is the only market currently achieving any degree of liquidity for dairy futures in Europe, are denominated in Euros. This means that currency hedging would also be required for UK operators. Role of the Public Authorities in Developing Dairy Futures Markets There are several areas where the EU can play a role in facilitating the development of dairy futures markets. Market Data The European Commission can play a significant role in the provision of more robust and timely price and production data for the EU raw milk and dairy products. More robust dairy product price data across the full spectrum of dairy products (including butter, SMP, whole milk powder, whey and the main varieties of EU cheese) would: 

Provide confidence to futures market participants that all operators were working on the same shared market information.

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Provide reference prices: o against which futures contracts could be settled, o which could be the basis of price setting in contracts throughout the dairy industry supply chain, 104 of 373

Dairy UK — Written Evidence o which could facilitate through price indexation a closer alignment between futures markets and producer prices. Providing robust and timely price data for raw milk would greatly facilitate the development of futures contracts for raw milk. More timely EU data on raw milk and dairy product production would also better enable all market participants to monitor developments in supply, which, given the general price insensitivity of demand, is the principle driver of changes in price. Improvements in these areas would also significantly improve the benefit the industry obtains from the Milk Market Observatory. Training and Education Whilst other agricultural sectors such as cereals are already fully familiar with futures instruments, this is not the case for dairy. It will take an extensive programme of training and education in the sector before dairy farmers can see the benefits of using futures and are familiar with how they can be exploited. The Commission should permit Member States to use Rural Development funds for education and training programmes on the use of futures instruments in the dairy sector. EU Safety Net Until such time as private sector solutions to mitigate the impact of price volatility on the dairy sector emerge, then the EU, through the Common Agricultural Policy, should continue to play a residual role in market management to reduce the extremes of downward price volatility on the sector. The provision of an effective safety net, primarily through the operation of an intervention purchasing system, is the most effective means of addressing extreme price volatility. Intervention purchasing showed itself effective in addressing the volatility experienced in 2009. On that occasion it also showed itself to be cost neutral to the EU budget. Intervention purchasing works through the Commission acting as a buyer of last resort when the market falls below the prices at which the EU can accept bulk butter and skimmed milk powder into intervention. The weakness of current arrangements is that intervention buying-in prices (successively called reference prices, now reference threshold) have not been changed since 2008 to ensure their continued relevance. To ensure that intervention remains effective the rules governing its use need to be modified to ensure that prices can be adjusted to take account of relevant factors whilst reassuring the market that intervention will not be exploited to create artificially high support prices. The reference price should be set at a level which, whilst avoiding the unnecessary destruction of productive capacity; 

Provided a strong incentive for a reduction in total EU milk production to ensure EU producers adapted production to market circumstances,

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Enabled the Commission to operate intervention purchasing profitably over the price cycle by ensuring that purchasing and storage costs can be recovered through revenue from sales of stock.

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Dairy UK — Written Evidence This framework would ensure that the system would not expose the EU to the risk of permanent stock accumulation and would ensure that the system was: 

only focused on addressing price troughs that fell below the underlying trend for the market

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not a burden on the EU budget, and could even provide a source of revenue, as was the case with intervention purchasing for dairy products the last time it was employed.

Compatibility with the Development of a Futures Market The experience of the USA shows that futures markets can be successfully developed and operated alongside market management mechanisms such as intervention. Compatibility between intervention and other policy mechanisms such as Private Storage Aid can be achieved if: 

The intervention price is announced well in advance of and left unchanged during the downswing of any price cycle.

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Product released from intervention is sold on a purely commercial basis, e.g.; the Commission is placed under a legal imperative to maximise the value of its stock holding. This would ensure that the Commission would have the same economic incentives as other market participants and therefore its actions would be equally predictable and minimally market distorting.

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Other market support measures such as Private Storage Aid are also announced well in advance of any market cycle.

Future EU Policy Initiatives EIB Initiative The European Investment Bank has entered into a joint initiative with DG Agriculture to allow farmers greater access to cheaper loans that could be integrated into the Rural Development Programmes of EU Member States. The initiative aims to give security to banks offering loans to the farm sector encouraging them to lend and offer more favourable conditions such as lower interest rates, longer repayment periods and fewer requirements for collateral. The possibilities afforded by this initiative should be examined by Defra and the devolved administrations. Margin Protection Programme Longer term, as part of the debate on the future of the CAP, consideration should be given to the feasibility of adapting the Margin Protection Programme that has recently been implemented in the USA. The programme acts as a system of subsidised price insurance for dairy farmers which provides income to farmers in the event margins fall below specified levels. Significant changes would be necessary to adapt the programme to the diversity of circumstances that prevail across the EU. These challenges should be researched by the European Commission.

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Dairy UK — Written Evidence Origins of Price Volatility in the Dairy Sector The main cause of the current price reduction in the UK is the global over supply of milk relative to demand. EU milk supply has surged following the abolition of quotas and demand continues to be affected by the Russian import ban and a normalisation of Chinese buying. In a situation of over supply surplus milk is processed into commodity products such as bulk butter and skimmed milk powder and also to some extent into generic cheeses. Prices for these products have slumped. Short Term Market Dynamics These products are also internationally traded so trends in world markets directly affect the returns in UK commodity markets. There is also a multiplicity of mechanisms by which trends in dairy commodity markets immediately affect returns from fresh product markets. 

60% of the butterfat supplied in the raw milk used for liquid milk is sold as cream, the price of which is determined by the butter market.

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The imbalance between the seasonal production of raw milk and the demand profile for fresh products means that some portion of the raw milk contracted to processors of fresh products is also processed into commodity products. This imbalance between supply and demand profiles also exists on a weekly basis with demand for liquid milk peaking on Thursday to allow stocking for the weekend and again on Monday for restocking. There can also be significant variations in demand over the holiday season.

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Any increase in domestic milk production above contracted demand for fresh products is also directed towards commodity products.

Separately, the returns from food service and the food ingredient market can be volatile as products are not branded and the priority for customers is value. Medium Term Market Dynamics Over the entire price cycle, returns from commodity markets influence the prices at which contracts for fresh products are renegotiated. The frequency of contract renegotiation varies between industry customers. In a falling market, milk from lower returning commodity markets can be redirected to higher returning markets with a consequential impact on returns for all markets. This redirection of milk can be undertaken because in the overwhelming majority of cases any quantity of raw milk is easily substituted. This gives raw milk itself the characteristic of a commodity product. In terms of economic theory this means that: ‘as a homogenous undifferentiated product with multiple competitive end-uses, the trend in the price of raw milk is determined by the marginal use to which it is put’, which for dairy is generally bulk butter, skimmed milk powder and generic cheeses.

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Dairy UK — Written Evidence A further complicating factor is currency. From an average in 2013 of £1 = €1.177 sterling has revalued to £1 = €1.366, a rise of 9.6% with a proportionate impact on market returns. Judged against these market dynamics UK dairy markets are operating efficiently. They are not dysfunctional, distorted or operating outside European norms. Farmgate prices now closely follow the UK’s main EU competitors. For the industry to be successful UK raw milk prices have to remain internationally competitive. Volatility and the Role of Processors In the market in which the dairy sector operates, dairy processors, whether co-operatives or private, do not have the resources to protect their supplying farmers from price fluctuations. Efforts by processors to shield farmers from price fluctuations would expose the processing industry to the risk of bankruptcy. Each 1 pence per litre change in raw milk prices equates to £140m. The current profitability of the dairy processing sector in its entirety is now believed to be significantly less than this amount. Some independent commentators have contended that in this year total processing industry losses have amounted to £200m. Processors, whether co-operatives or private, can generally only offer price stability with the support of their customers. Such arrangements exist with the aligned supply chains operated by major retailers for the supply of liquid milk where farmers generally receive a higher price than those that are subject to market pricing. However, these arrangements only cover a small minority of UK milk production and, given the retail price discounting for liquid milk, probably represent a major cost burden for retailers. Investment in Capacity as a Remedial Strategy It has been contended by some commentators that the UK dairy industry should address the issue of price volatility and increasing market returns by undertaking import substitution through major investment in new capacity. This would be a high risk strategy that would not protect the industry from price volatility. To be cost efficient a modern processing plant has to process 500 to 1,000 million litres per annum (3.5% to 7% of UK milk supply) which would require a significant outlay of capital. For a cheese plant the cost of the investment would probably have to matched by an equivalent investment in stocks whilst product matures. Farmers would have to be recruited from competitors to supply the plant. The disposition of milk production into increasingly distinct milk fields would make this extremely challenging. New customers would have to found for the product which would require contracts to be won from foreign competitors. Prices would have to be internationally competitive which would be particularly challenging with a weak Euro, consequently farmers would still be exposed to price volatility. Overall large scale step change investment in new plant would represent a high risk strategy, especially when industry margins are either small or negative. Impact of Processing Industry Structure on Volatility Whilst companies more directly involved in commodity markets are more immediately exposed to price volatility, overall, at a national level, variations in industry structure do not protect dairy farmers from price volatility. Despite significant differences in the structure of dairy processing in terms of ownership (farmer owned versus private), concentration (fragmented versus highly concentrated), exposure to export markets and the

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Dairy UK — Written Evidence preponderance of branded products, the UK’s immediate EU competitors still suffer from a similarly high degree of price volatility.

Graph 1: EU Farmgate Prices: Pence Per Litre from January 2005 40.00 35.00 30.00 25.00 20.00

Belgium

Denmark

Germany

Irleand

France

Netherlands

U.K.

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Impact of Price Volatility on the Dairy Sector Price volatility means dairy farm profitability fluctuates from year to year. This creates uncertainty for dairy farmers which makes short and long term business management challenging. Table 1: Average Farm Business Income per Dairy Farm; Source Defra 2007/0 8

2008/0 9

2009/1 0

2010/1 1

2011/1 2

2012/1 3

2013/1 4

2014/1 5

England 55,100

69,400

59,000

66,000

86,500

52,500

88,000

78,000

Wales

21,300

62,200

48,600

57,500

68,000

45,000

77,000

59,500

Scotlan d

69,600

78,400

58,900

78,000

82,000

45,500

79,500

n.a.

N. Ireland

58,700

37,500

19,900

51,500

58,000

28,000

61,500

40,500

For some dairy farmers downward price volatility results in their forced exit from the sector. There is a concern that dairy farmers that have invested heavily in farm expansion, with a considerable exposure to debt, are more vulnerable to closure in price downturns.

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Dairy UK — Written Evidence Processors are also affected by volatility, particularly companies making mature cheeses. Price fluctuations can create a mismatch between raw material costs and final market realisations. 7 January 2016

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Dr Phil Dawson — Written Evidence

Dr Phil Dawson — Written Evidence Agricultural product prices have been decoupled from production in the EU since 2005 and farmers now face world market prices. Prices rose dramatically in 2007 after a period of relative stability and there is evidence that subsequent volatility has risen. Volatile prices concern farmers, input supply firms and food processors because they affect the marginal value of storage, so when prices (and production and demand) are more volatile, the demand for stocks increases because higher stocks are required to smooth supply and reduce marketing costs. Increasing price volatility may lead to higher stocks and higher cash prices. Price volatility also drives the demand for hedging by farmers. In efficient markets, price reflects all information available, market participants have rational expectations and are risk-neutral, the futures price is an unbiased estimator of the future cash price, and is impossible to gain from speculation. If the market is inefficient and price deviates from its fundamental value, and gains (and losses) can be made from speculation.2 Various factors have been put forward to explain both higher prices and increased volatility since 2007. Supply-side factors include high oil/fertiliser prices, low investment, export restrictions (particularly a cereals export ban by Russia in 2010), and adverse weather conditions including droughts in Australia in 2006 and 2007, a poor harvest in the US in 2010, and droughts in the US, Russia and the Ukraine in 2012. Demand-side factors include rising demand by emerging nations, especially China and India, increasing demand for biofuels, and declining stocks. Explanations of higher future price volatility include low stocks, increasing speculation, and the current financial crisis. There is no consensus about the relative weights of each explanation. I have estimated the volatility of futures prices for feed wheat on the LIFFE3 and tested whether it has increased since 2007.4 Volatility is measured by time-varying variances in a statistical (GARCH) model. The data consist of daily futures prices for 1996-2012. Price and returns (daily percentage changes in prices) are illustrated in Figure 1. Prices were relatively low and stable before 2007 but they fluctuated at generally higher levels thereafter. Variations in returns appear to increase after around 2007. Beforehand, price ranges between £56-116/tonne and £88-218/tonne thereafter; between the two periods, the mean price almost doubles from £77/tonne to £145/tonne as does its standard deviation; and the standard deviation of returns (which is a simple measure of volatility) increases by almost 50%. Results: 

In June, 2007, there is a structural break in estimated volatility which rose by 10%, and average volatility more than doubled from 1.13% before June, 2007 to 2.66% thereafter (Figure 2).



A 1% increase in the futures price leads to a 0.04% increase in volatility.

2

Fundamental value is qualitative and quantitative information that contributes to the financial valuation of a financial asset. Speculators examine fundamentals to analyse whether the underlying asset is a worthwhile investment. 3 Euronext/London International Financial Futures and Options Exchange. 4 Dawson, P.J. (2015). Measuring the Volatility of Wheat Futures Prices on the LIFFE, Journal of Agricultural Economics, 66(1), 20-35.

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Dr Phil Dawson — Written Evidence 

Volatility is stable and highly persistent and the increase in volatility since June, 2007 appears not to be short-lived.

It seems likely that these results will generalise to agricultural commodity futures markets elsewhere.

Higher volatility (and therefore higher price risk) may lead farmers, traders, input supply firms and food processors to implement better financial management strategies which include the use of futures and options, insurance, storage, and diversification or 112 of 373

Dr Phil Dawson — Written Evidence collaboration to share costs. However, agricultural futures market coverage in the UK is incomplete, and only feed wheat and sugar contracts are traded on the LIFFE for indigenous products. Other futures markets of interest to UK farmers are the Marché à Terme International de France (MATIF) in Paris which trades futures on milling wheat, malting barley, rapeseed and corn, and the European Exchange (EUREX) in Eschborn, Germany which trades futures on potatoes for the British market. Hedging on foreign futures markets involves exchange rate uncertainty which mitigates against its use. UK farmers in general currently hedge little and a lack of awareness and knowledge are constraints to more widespread use. There are no government policies or programmes to manage crop risk; and while private insurance for hail is available, no cover exists for price or yield risks.5 Conversely, buyers - traders, input supply firms and food processors - do hedge and competition forces them to pass at least part of the benefit back to the producer, and increased costs of hedging (due to increased volatilities) can be expected to be passed back to farmers and upwards to consumers. There is an array of both international and national supply-side policy instruments available. At the international level, buffer stocks could be established by cross-country collaboration to maintain strategic reserves, promote food security discourage excessive speculation. These stocks could be released onto the market when a price spike is forming but it is difficult to identify appropriate price triggers. Moreover, buffer stocks are costly and could crowd-out private stock-holding, they may lead to lower supply response, and they may move futures prices away from fundamentals. At the national level, import tariffs/subsidies, export restrictions and export taxes could be used to insulate domestic markets either partially or fully, to protect domestic markets against price volatility on international markets. A likely effect however is to increase price volatility as international markets fragment and become less liquid, and the problem is exported to other countries. Conversely, trade liberalisation and the promotion of efficient resource use tend to reduce price volatility. Price control or administered prices backed by intervention stores could also be used to address price volatility, but such policies undermine market mechanisms and domestic market intervention may be costly if arbitrage in international markets is to be avoided. National buffer stocks suffer from the same problems as those at the international level. Governments could also buy call options from biofuels producers to divert grain from biofuels to food when prices are deemed too high. While stable international commodity prices are a global public good, there are attendant free-rider problems and it is not surprising that policy responses to price volatility are not encouraging. In short, traditional agricultural policies cannot address the fundamental problem of price behaviour on world markets, and the implementation of a crop insurance scheme may be more fruitful. In a second and as yet unpublished paper with Dr. Ana Sanjuán-Lopez,67 we examine the impact of speculation in the form of index trading on corn, soybeans and wheat markets on the Chicago Board of Trade using statistical (MGARCH) models and weekly data for 20062014. Index trading of large volumes can create a futures price bubble if prices exceed 5

In the US, the Federal Crop Insurance Corporation under the US Department of Agriculture promotes the economic stability of agriculture through crop insurance. Insurance is bought by farmers to protect against either crop loss due to natural disasters, such as hail, drought, and floods, or revenue loss due to falls in the prices of agricultural commodities. 6 Dr. A.I. Sanjuán-Lopez is a Researcher at the Agrofood Research Centre of Aragón (Instituto Agroalimentario de Aragón, IA2-CITA-Universidad de Zaragoza), Zaragoza, Spain (tel: +34 976716349; email: [email protected]). 7 Sanjuan, A.I. and Dawson, P.J. (2015). Index Trading and Spillovers on US Grain Futures Markets: A Multivariate GARCH Approach. Unpublished manuscript.

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Dr Phil Dawson — Written Evidence fundamental values, and this is the "Masters' hypothesis".8 We also assess spillovers between these three commodities but we do not examine linkages with other financial assets and in particular oil futures prices.9 Figure 3 illustrates both prices and returns. In January, 2006, futures prices were low but they then increased until June, 2008, by 69% for corn and by 60% for soybeans and wheat. Subsequently, these prices have fluctuated at higher levels with peaks in August/September, 2012. Figure 3 also illustrates index trading which is measured by weekly net long positions (where net long positions (NLIT) equals long positions minus short positions10). Results: 

Returns are significantly and positively affected by contemporaneous changes in own index trading, but last week's index trading reduces returns. In aggregate, the negative effects of last week's own index trading is more than outweighed by contemporaneous effects, and index trading increases futures returns and prices. This supports the Masters' hypothesis and contrasts with many finding elsewhere.



Volatility depends positively on own past volatility and there is some mild evidence of volatility spillovers. The commoditisation (or financialisation) of agricultural futures markets seems small.



Index trading reduces own volatility.

Index trading in agricultural futures contracts has two effects: 

There is an adverse effect as futures prices increase and a benefit of falling volatility and hence risk, but the net benefit to farmers, input supply firms and food processors (in terms of their respective hedging strategies) is unclear.



Index trading of large volumes leads to increases in futures prices and lends support to limiting speculation on agricultural futures markets. Index trading should be monitored by regulatory authorities but they need to be mindful that the effects of index trading on own returns are inelastic,11 spillovers from other agricultural commodity markets are small, and contagion from herd behaviour appears not be a matter for concern. Moreover, limiting speculation may lead to increasing volatility, may mitigate against the important roles of traders who provide liquidity and absorb risk, and may drive funds into international futures markets that have fewer regulations.

8

Masters, M.W., 2008, Testimony before the Committee on Homeland Security and Government Affairs, U.S. Senate. 9 There is much empirical evidence of volatility spillover from oil prices to agricultural commodity prices since 2006/07, and agricultural and energy markets are integrated. (A recent example is: Nazlioglu, S., Erdem, C. and Soytas, U., 2013, Volatility spillover between oil and agricultural commodity markets, Energy Economics, 36, 658665.) 10 A long position involves buying a commodity with the expectation that its price will increase; while a short position involves selling a borrowed commodity with the expectation that its price will fall. 11 In this case, a 1% increase in index trading leads to around a 0.3% increase in returns in the same week and no more than a 0.2% fall in the following week.

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Dr Phil Dawson — Written Evidence

Figure 3: Data Price (cents/bushel)

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15 December 2015

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2011

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2014

Department for Environment, Food and Rural Affairs — Written Evidence

Department for Environment, Food and Rural Affairs — Written Evidence Introduction Food and drink is the country’s biggest manufacturing sector, worth over £100bn to the UK economy – bigger than cars and aerospace combined. The Government’s ambition is to see a thriving, resilient UK food and farming industry that leads the world in innovation. We are working with the industry on an ambitious 25-year plan for food and farming, setting out how we can grow more, buy more and sell more British food. It is a vision which will help ensure skilled new entrants come into the industry; make it easier to set up and grow food and farming businesses; and build resilience while cutting red tape. The ending of quota systems and the move to freer market conditions, whilst welcome, has added a new element of uncertainty to EU prices and production. Farmers across the industry, from arable to dairy, know the challenges that this presents; price fluctuations and risks of income loss affect farmers’ production and investment decisions and undermine farm competitiveness and innovation. Recent volatility is not a one-off. It is an inherent feature of agricultural markets, and we can expect more volatility in the future. The government is extending tax averaging for farmers and investing in technological advances to help farmers improve their productivity. Farmers already have access to a number of risk management tools, including diversification, “self-insurance” through saving and borrowing, forward contracts and futures markets. The Government believes there should be further emphasis on equipping farmers to take ownership of the risks they face. Greater use of tools such as futures markets would help the industry through periods of unpredictable price shifts and give farmers more certainty over their future prices. Key trends Price variability is an intrinsic part of all markets, as prices adjust to changing market conditions. While demand for agricultural commodities tends to be continuous and steady, supply is less predictable due to seasonality, weather and other natural factors. Farmers, processors and consumers are used to this normal market feature. At the same time there is increasing concern about price volatility on both producers and consumers, especially the most vulnerable. Analysis by the OECD and the FAO suggests that the period since 2006 has been one of substantial price volatility compared to earlier years, although not over the long term. Greater market orientation in the EU farming sector can improve efficiency and productivity, but also bring more exposure to price volatility on international markets. There is general consensus that price volatility will remain an important policy concern. A more detailed discussion of price volatility is enclosed at Annex A.

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Department for Environment, Food and Rural Affairs — Written Evidence Industry’s management of price risk Farmers have a number of tools at their disposal with which to manage price risk. Diversification both within and beyond agriculture can reduce the farmer’s risk and introduce alternative sources of household income. Farmers can mitigate price risk through specific approaches to marketing their output, such as forward contracting or long-term contracts which provide greater certainty. Farmers can act collectively to manage risks and reduce their overheads, including through producer organisations and co-operatives. For example, this can give farmers a stronger influence when marketing their products or purchasing fuel or feed, and provide opportunities to combine their different skills. Self-insurance, mutual funds and tax averaging can also help to reduce overall risks to farmers’ incomes. The industry levy body, AHDB, plays a valuable role in supporting farmers to manage risks. Animal feed is the single largest expense in the production of pigmeat, accounting for approximately 60% of the total cost. Volatility in the commodity market can cause large and unforeseen changes in the price of feed, which can have an almost immediate impact on producers. AHDB Pork has developed a feed calculator which can be used to help identify the impact of changes in the price of wheat and barley on costs of production. AHDB also plays an important role in helping farmers to improve their business and financial planning skills. Price risk can be mitigated through various market-based approaches, including exchangetraded futures and options contracts, and similar over-the-counter (OTC) products. Farmers have used these risk management tools for a long time in countries where agricultural commodity prices fluctuate widely, in particular in the US. In Europe, however, where the CAP has supported and stabilized prices and provided substantial subsidies, many farmers are still unaccustomed to these hedging instruments. Various factors affect farmers’ decisions to use different risk management tools. There are significant differences in usage by farm size and farm type; for instance, cropping farms have made greater use of futures contracts and related risk management tools such as forward contracts or currency hedging compared to dairy or livestock farms. Farms with higher economic performance also tend to make more use of these tools. A substantial proportion of farmers cite lack of understanding (of how useful a particular tool will be, and/or how to use it) as a reason for not using risk management tools. This is more likely to be an issue in the case of newer and more complex tools like options and futures trading, where farmers may be deterred by the time and cost involved in learning how to use them. The Common Agricultural Policy Historically, market price support under the CAP maintained prices above market levels for many products. This generated costs to EU consumers, whilst providing relative price stability. However, the intensity of market intervention has declined significantly as a result of CAP reform since the early 1990s, leaving EU markets more open to respond to fluctuations of supply and demand. The reduction in market price support in 1992 was compensated for by the creation of coupled direct payments, which have subsequently converted into the Single Payment Scheme and today the Basic Payment and Greening Payment.

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Department for Environment, Food and Rural Affairs — Written Evidence Market management tools have not been completely abandoned in the EU. Instruments available in the various market sectors following the CAP2020 deal include intervention buying, emergency powers to address “serious market disturbance”, a crisis reserve, and an ongoing facility for export subsidies. In September 2015, the Commission published a comprehensive €500m package of measures to support European farmers after a prolonged period of low prices. While not expressly designed as a risk management tool, direct payments help to shield EU agriculture against revenue fluctuations. In addition, the second pillar of the CAP offers a new risk-management toolkit including the possibility of insurance schemes for crops, animals and plants, as well as mutual funds and an income stabilisation tool. To date, only a few Member States have adopted this tool within their Rural Development (RD) Programmes. Some Member States have preferred to use national funds under the state aids rules to provide support for insurance, and some are concerned about the potential expense of the income stabilisation tool in comparison with the size of their RD Programmes. During the CAP2020 negotiations the UK argued that these risk management tools were more appropriate to Pillar 1 and should be regarded as a possible alternative to direct payments. The Commission has announced the formation of a new High Level Group focused on financial and risk management instruments such as futures markets for agricultural products. These markets do not guarantee high prices, but are a way of dealing with unanticipated price volatility. In addition, the Commission is working closely with the European Investment Bank (EIB) on options for establishing financial instruments; for example, designing instruments where re-payment schemes are linked to commodity price developments. The EU Commission has increasingly concentrated on improvements in market transparency, particularly on public stocks and the dissemination of relevant information throughout the food chain. Access to accurate information, transparency and prompt publication are key elements for making informed decisions and taking better advantage of market opportunities. The EU Milk Market Observatory (MMO) is evolving as an important facility for improving price transparency and access to data and analysis of future market trends. Building on experience with the dairy market and the MMO, the Commission has now launched similar tools for beef, cereals, pigmeat, poultry and sugar. Further information on risk management tools within the CAP is at Annex B, attached. Role of government The UK government is working to increase the long-term resilience of the industry. As announced by the Chancellor in Budget 2015, we are extending the existing system of tax averaging for farmers. From April 2016, farmers will be able to average out their profits from farming over five years instead of two years. This will help them better manage potential fluctuations in income caused by a range of industry specific factors. These vary from price movements in global markets to swings in yields caused by the weather or by disease. The most common reason for not undertaking risk management practices in agriculture is that the benefits are not clear to the farmer. Ultimately, the industry itself has a crucial part to play. However, Defra has published a wide range of advice available to farmers, including how to write a business plan, manage accounts, undertake benchmarking and plan future activity. This includes information on specialist business and financial support to help farmers

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Department for Environment, Food and Rural Affairs — Written Evidence run their businesses as efficiently as possible. Advice is also available for farmers who are thinking of diversifying, by adding new business activities to traditional farming. Tools such as futures markets are one way to manage the risk to farm incomes from price volatility by bringing some level of medium-term predictability to pricing structures. There is growing interest in exploring the potential for more futures market trading for dairy farming and potentially other sectors; existing markets in the cereals sector enable producers to hedge against risk by knowing prices about a year in advance. The Government will explore the opportunities for dairy futures and other price risk management tools in the UK in order to support stability and resilience. This work will also help to inform UK input into the Commission’s new High Level Group. In addition, the Government is actively considering the introduction of financial instruments in the new Rural Development Programme. Technological advances have huge potential to enhance farmers’ income and livelihoods by improving productivity and reducing costs of production. The Government’s £160m AgriTech Strategy is investing in a range of food and farming ‘Catalyst’ projects. The Agri-Tech Catalyst, run by Innovate UK and Biotechnology and Biological Sciences Research Council (BBSRC), is supporting collaborative research between scientists and businesses to take ideas from the lab to the farmer’s field. Annex A: Volatility Volatility refers to variations in agricultural prices over time. Not all price variations are problematic as they send important signals affecting production decisions, but they can be when they are large and unanticipated. In this case they create a level of uncertainty which increases risks for producers, traders, and consumers. Most agricultural commodity markets are characterised by volatility. Three major market fundamentals explain why: 

agricultural production varies because of natural shocks such as weather and pests;



demand elasticities are relatively low, as are supply elasticities (at least in the short run) meaning that to get supply and demand back into balance after shock can require quite a large change in price;



supply response to changing prices in agriculture is lagged because production can take a long time, which can lead to cyclical adjustments (such as the ‘hog cycle’) which add an extra degree of variability to the market

When looked at in the long term there is little evidence that volatility in international agricultural commodity prices is increasing. Volatility has, however, been higher during the decade since 2000 than during the previous two decades. Another long term trend in volatility is that periods of high and volatile prices are often followed be periods of relatively low and stable prices. Irrespective of any conclusions drawn from the long term trends, it is clear that the period since 2006 has seen high volatility, especially compared to years immediately prior to that. The figure below shows international agricultural commodity prices and the IMF food index since 1970.

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Department for Environment, Food and Rural Affairs — Written Evidence Global Agricultural Commodity Prices in Real Terms (2005=100)

Source: OECD Domestic price movements can be different from those on international markets. The extent to which global prices are transmitted to domestic markets depends on how strongly integrated the latter are with the former. Within the EU this can be seen clearly with the example of the dairy market. Up until 2006, EU policies such as import tariffs and the milk quota kept the EU milk market relatively detached from the world market with prices following a seasonal cycle and hovering above the EU support price. As the dairy market was reformed and liberalised with the relaxation of the quota, EU dairy became more integrated with the world market and began exporting competitively. One effect of this integration is that EU milk prices have begun to align with the more volatile world (New Zealand) milk price. The integration into world markets, however, of EU production and consumption (both of which are globally significant) will tend to deepen those international markets and make them more stable. Likewise, the EU’s move away from the use of export subsidies also contributes to the stability of world markets.

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Department for Environment, Food and Rural Affairs — Written Evidence Milk Equivalent Prices in EU and World/Oceania (€/100kg) Since 2000

Source: European Commission Exchange rates can also have an impact on volatility. Exchange rates move because of a range of macroeconomic changes. If the pound strengthens then imports that can compete in the UK market become cheaper pushing down UK prices, and vice versa if the pound weakens. At the same time, the exchange rates of major agricultural exporters can affect global markets. If the Brazilian real weakens then Brazilian exports can experience price falls, leading to price falls on world markets. Policies of governments also have a role. Governments can attempt to stabilise their domestic market, and in so doing export instability onto the world market. For example, during the 2007/8 price spike in world agriculture markets, several countries sought to institute export bans in agricultural products to avoid seeing dramatic price rises domestically. The result for other countries was a much greater price rise and instability on the world market. Annex B: Risk Management Within the CAP Whilst farmers face many risks which manifest as volatility in agricultural markets, these risks differ in the probability and impact. Consequently, different risks imply different potential roles for government. The OECD segments risks according to probability and income loss. Those which occur frequently but with relatively little damage to farm incomes are best dealt with on-farm strategies such as diversification of activities or saving. Less probable and more damaging risks are likely to be marketable – for example, using futures markets to cope with price volatility, or insurance for specific crop risks. There can be a role for government in helping these private sector tools develop. Catastrophic risks which occur only rarely, are highly damaging, and tend to affect the whole sector at the same time, are most associated with government support, either ex post support payments or publicly provided insurance.

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Department for Environment, Food and Rural Affairs — Written Evidence

Source: OECD Risk management tools are available for EU member states to use in agriculture under both the state aids rules and the CAP. Different member states have made different choices – for example, Spain has offered a wide range of insurance programmes using state aids for many years. Since 2003 a proportion of CAP funds has been able to be used to support insurance programmes. The Commission itself has argued that “income stabilisation is…largely provided by the new system of decoupled payments” (now known as the Basic Payment Scheme). For CAP 2014-20, the risk management provisions were moved from the rules concerning Pillar 1 to Pillar 2 – that is, they became part of rural development. CAP rural development funds are able to be used for: 

financial contributions to insurance premiums;



financial contributions to mutual funds dealing with climatic, sanitary events and environmental incidents;



financial contribution to mutual funds dealing with a severe drop in farm income as an Income Stabilisation Tool.

The risk management toolkit in the CAP is designed to comply with World Trade Organisation (WTO) rules on agri-insurance support – in particular, the insurance and mutual fund products are only allowed to cover losses greater than 30% of production or income. Within England (and the rest of the UK) we have not chosen to make use of the risk management toolkit. The UK allocation of Pillar 2 is the smallest in the EU, measured in per hectare terms. In addition to this constraint it is not clear that risk management support is well suited to Pillar 2. During the CAP negotiations the UK argued that risk management should remain in Pillar 1: other countries, such as Canada, who have extensive insurance 122 of 373

Department for Environment, Food and Rural Affairs — Written Evidence support (and who were the inspiration for the Income Stabilisation Tool) have these supports instead of the direct payments we use in the EU, not alongside them. The recent US Farm Bill which moved US policy to being centred on insurance, also removed their direct payments. 16 December 2015

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Department for Environment, Food and Rural Affairs — Supplementary Written Evidence

Department for Environment, Food and Rural Affairs — Supplementary Written Evidence In oral evidence to the Committee, Minister Eustice agreed to send a note to the committee on the practicalities of running ‘insurance’ schemes. This note sets out ‘insurance’ schemes in other countries and briefly sets out the practicalities of running similar schemes in the UK. There is often some confusion between different types of policy designed to address income risk under a general, or umbrella, term of “insurance’. It is important to differentiate between genuine insurance schemes and agricultural support policies designed to make payments to producers in times of ‘adverse’ market conditions. It is important therefore to distinguish between: (a)

(b)

‘counter-cyclical’ payments •

triggered by changes in incomes (or margins) relative to a reference period.

•

administered by Government and funded by taxpayers.

(b) insurance •

• provided by the private sector with farmers contributing in the form of premia.

•

•

•

• Government often subsidises premia and acts as a re-insurer for private companies.

can relate to single (e.g hail) or multiple risks.

Both (a) and (b) need to meet World Trade Organisation (WTO) conditions to be classified as ‘green box’ support. The WTO conditions are given in the annex to this note. North American schemes In the US, both counter-cyclical payments and insurance form an important part of agricultural policy. In terms of counter-cyclical payments, there are a number of schemes of which Agricultural Risk Coverage (ARC) is most prominent. ARC payments are triggered to producers participating in the programme when actual crop revenues are less than a ‘guaranteed’ crop revenue level. Producers can choose between county coverage, where revenues are calculated with county-level yields or individual coverage where revenues are calculated with individual farm yields. There is also a ‘deficiency payment’ scheme in form of Price Loss Coverage (PLC). In PLC, payments are triggered when actual market prices drop below reference levels. In the US dairy sector there is a specific Dairy Margin Protection Programme (DMPP). Payments to dairy producers participating in the programme are triggered when the national margin falls below a reference level chosen by the producer. National margins are calculated monthly by the USDA and defined as the national average milk price minus the average feed cost. The higher the reference margin chosen by the producer, the higher the contribution in terms of premium payments that the producer must make. Basic coverage is provided at no cost to producers (and borne solely by the taxpayer). 124 of 373

Department for Environment, Food and Rural Affairs — Supplementary Written Evidence In Canada, ‘AgriStability’ is a counter-cyclical payment scheme based on margins and data collected via the Canadian tax system. ‘AgriStability’ takes a whole-farm approach and is therefore not commodity specific. Payments are triggered to participating producers when a producer's margin (defined as allowable revenue less allowable expenses) in the program year drops below 70% of their average12 margin from previous 5 years (historical reference margin). In other words, payments are triggered when a producer’s margin falls by more than 30% relative to their historical reference margin. Producers contribute to the scheme but the fee seems designed to cover the administrative cost of the programme and is small in comparison to the potential pay-outs. In addition to counter-cyclical payments, crop insurance subsidies have long been a major element of US agricultural policy. There are many insurance products available to producers in the US including yield, revenue and price insurance. Insurance products are sold by private companies with USDA’s Risk Management Agency regulating and subsidising the premiums paid by farmers. A detailed description of the array of insurance products available is beyond the scope of this note. However, it is worth specifically noting the Adjusted Gross Revenue (AGR) plan which provides whole-farm revenue insurance against natural disasters and market fluctuations. Claims are assessed using producer’s tax records and producers are able choose a coverage level to determine how much of their revenue to insure. The government makes a contribution to the insurance premium that varies with the degree of coverage chosen. Previous Commission analysis The Commission have previously examined the cost of implementing a counter-cyclical payment in the EU. The Commission analysis estimated that a WTO-compliant countercyclical payment would entail a budgetary cost13 of circa 20%-30% of direct payments, with an annual average cost of around 25% of direct payments . The analysis also found that adopting such an income stabilisation tool would lead to a redistribution of support toward southern Member States. Practicalities of implementing schemes in the UK Volatility in the budget Counter-cyclical payments inevitability lead to volatility in support provided as the amount of support is dependent on incomes or margins which change in response to market (and farm specific) conditions. For example, the Commission’s 2008 analysis estimated that over the period 1998-2003 payments would have amounted, on average, to nearly €9.3 bn per year for the EU-15, varying between a minimum of €8 bn to a maximum of €12 bn. Insurance schemes, such as those in the US, typically have relatively volatile loss ratios – the ratio of indemnities to premiums paid – over time and the level of premium subsidies paid by Government is also relatively unstable.

12

The ‘Olympian’ average is used in which the highest and lowest values are excluded and the average is calculated on the remaining 3 years. 13 Commission of the European Communities (2008). Impact Assessment [of various Regulations and a Decision]. COM(2008) 306 final.

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Department for Environment, Food and Rural Affairs — Supplementary Written Evidence As a result, both counter-cyclical payments and insurance schemes would require sufficient flexibility in the budget from year to year and perhaps safeguards against very large payments in an individual year. Data requirements Data requirements are substantial in order to run counter-cyclical payment schemes. Indeed this is a substantial barrier in the short-term to medium-term development of any scheme in the UK as information on the individual incomes of farmers is not available14. However, there may be possibilities for using income tax records (as in Canada) or VAT records subject to HMRC advice but these would need careful further consideration. Due to the data requirements entailed in using actual incomes or margins at the farm-level, some schemes have used imputed incomes or margins as proxies. For example, the DMPP in the US uses an imputed margin calculated by the USDA – not an actual margin for individual producers – to trigger payments. In the current absence of data on individual farm incomes, a UK scheme could use imputed data based on industry average margins for example but these would be different by sector and thereby imply a commodity-specific approach which would add complexity to any policy. Whilst using imputed data is less costly, as a consequence such schemes fail to address the significant volatility in income than exists at the individual farm-level. Accordingly, schemes which use imputed rather than actual income can become less well-targeted. There is a trade-off between the effective targeting of a scheme with its data requirements and administrative cost. For insurance schemes, the data requirements are managed by private companies offering insurance products and would involve participating producers to submit verifiable income (for example from tax records) and other information to allow insurers to identify the likely level of risk. Administrative cost The administrative costs of counter-cyclical payment schemes is assumed to be relatively burdensome given the data requirements and verification required. The Commission have previously highlighted administrative burdens as being a significant problem with these schemes15. In the Canadian system it appears the participation fee paid by farmers is designed to cover some of these administration costs. In insurance schemes, administrative costs are included in the premium paid by the producer. Government insurance subsidies can be used to cover these administration costs. Private sector provision in the UK The private market for agricultural insurance in the UK is not well-developed, particularly in comparison to countries such as the US. Insurance is provided by the private sector for hail and livestock disease in the UK but we are not aware of other insurance products available to the sector. A shift toward private insurance would be a very significant change in the UK agricultural sector. 14

The Farm Business Survey contains only a very small sample of the farms in England. Commission of the European Communities (2001) Risk management tools for EU agriculture, with a special focus on insurance. Working Document, Agriculture Directorate-General. 15

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Department for Environment, Food and Rural Affairs — Supplementary Written Evidence It is unlikely that the private sector would be willing to run and operate a scheme without government support. Income risk could be seen as ‘systemic’ in that a period of low prices across sectors could lead to significant pay-outs across a large number of farmers at the same time. Correspondingly, agricultural insurers may find it quite difficult to diversify income risk. Government would potentially need to perform a role of re-insurer and indeed this is the case in many countries where insurance is used. In the US, the private sector has been able to offer insurance products due to significant taxpayer support. The demand for counter-cyclical payments and insurance schemes is to some degree dependent on other forms of agricultural support. The direct payments system, and preceding agricultural policies such as market price support, has assumedly had some impact in mitigating incentives for private sector provision of income insurance. In other words, public policies have partially crowded out the development of private sector tools. Further economic considerations The asymmetry of information between insurers and the insured can lead to problems which require consideration. Schemes can promote ‘moral hazard’ when farmers undertake more risky behaviour because they are insured against any subsequent losses (this is common in many insurance markets). In addition, if the scheme is voluntary then it may attract farmers with more volatile incomes (“adverse selection”) and raise the cost of support. Counter-cyclical payment and insurance schemes in other countries often attempt to mitigate the problems of ‘moral hazard’ and ‘adverse selection’ through policy design. The use of a rolling historical reference period is common which reduces incentives to adjust performance downward to trigger payments and insurance products often include provisions for reduced premiums to producers who do not make claims in a set period. Annex: WTO conditions on ‘green box’ eligibility Agricultural support policies are classified by boxes in the World Trade Organisation. The ‘green box’ designation is used for support which does not distort trade, or at most causes minimal distortion. The ‘amber box’ is used for policies which are trade distorting and such policies are subject to budgetary limits under WTO rules. The ‘blue box’ applies to policies which would normally fall into the ‘amber box’ but also entail a requirement to limit production (and arguably therefore limit the impact of trade distortion). For ‘counter-cyclical’ payments and crop insurance support to qualify as WTO ‘green box’ support, certain conditions must be met. The conditions are set out in in Annex 2 to the Agreement on Agriculture following the 1994 Uruguay round. The conditions are given below: Uruguay Agreement: Agreement on Agriculture, Annex 2 paras. 7 and 8 Government financial participation in income insurance and income safety-net programmes (a)

Eligibility for such payments shall be determined by an income loss, taking into account only income derived from agriculture, which exceeds 30 per cent of average gross income or the equivalent in net income terms (excluding any payments from the same or similar schemes) in the preceding three-year period or a three-year average based on the preceding five-year period, excluding the highest and the lowest entry. Any producer meeting this condition shall be eligible to receive the payments. 127 of 373

Department for Environment, Food and Rural Affairs — Supplementary Written Evidence (b)

The amount of such payments shall compensate for less than 70 per cent of the producer’s income loss in the year the producer becomes eligible to receive this assistance.

(c)

The amount of any such payments shall relate solely to income; it shall not relate to the type or volume of production (including livestock units) undertaken by the producer; or to the prices, domestic or international, applying to such production; or to the factors of production employed.

(d)

Where a producer receives in the same year payments under this paragraph and under paragraph 8 (relief from natural disasters), the total of such payments shall be less than 100 per cent of the producer’s total loss.

Payments (made either directly or by way of government financial participation in crop insurance schemes) for relief from natural disasters (a)

Eligibility for such payments shall arise only following a formal recognition by government authorities that a natural or like disaster (including disease outbreaks, pest infestations, nuclear accidents, and war on the territory of the Member concerned) has occurred or is occurring; and shall be determined by a production loss which exceeds 30 per cent of the average of production in the preceding three-year period or a three-year average based on the preceding fiveyear period, excluding the highest and the lowest entry.

(b)

Payments made following a disaster shall be applied only in respect of losses of income, livestock (including payments in connection with the veterinary treatment of animals), land or other production factors due to the natural disaster in question.

(c)

Payments shall compensate for not more than the total cost of replacing such losses and shall not require or specify the type or quantity of future production.

(d)

Payments made during a disaster shall not exceed the level required to prevent or alleviate further loss as defined in criterion (b) above.

(e)

Where a producer receives in the same year payments under this paragraph and under paragraph 7 (income insurance and income safety-net programmes), the total of such payments shall be less than 100 per cent of the producer’s total loss.

30 March 2016

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DG AGRI, European Commission — Written Evidence

DG AGRI, European Commission — Written Evidence The Commission’s Approach to Risk Management and Price Volatility Are you concerned about the recent trends in agricultural price volatility? Do you think that the situation is worsening? Price volatility is surely not unknown in agricultural markets. It is driven by the simple fact that demand for food is daily and continuous, while food supply is influenced by the annual cycle of crop production, and its dependence on weather. Farm policies have attempted to address this reality in different ways, for centuries now. However, the more recent strong interest on the impact of price volatility on agriculture and food is driven by excessive price volatility, and the difficulties it generates, from production planning to long-term investment plan and investment. We have been analysing these developments, especially what appears to be a reversal of the long-term downward trend of real (deflated) agricultural prices, since the price spike of 2008. Our conclusion is that, more worrying than volatility, which by the way did not increase in all products and during all the period after 2008, has been the uncertainty linked to the co-existence of three trends: volatility, co-movement of all commodity prices, and a price level that has generally been higher than historical averages. While at times volatility dominated recent price trends, it is the decline of all commodity prices that dominates developments in recent months. As we have repeatedly indicated, the explanation of such developments is found in more than one factor. The slowdown in China and the so-called "emerging economies" explains to a large extent the demand impact of recent developments, including part of the collapse of the oil price. However, it is evident that most of the decline in the price of oil is driven by oversupply in this, as well as in the natural gas market. Agricultural prices were caught in this downward price trend primarily through the influence of the energy markets and of exchange rates. However, abundant supplies resulting from favourable weather and overreaction to the previously favourable demand environment account for a significant part of this downward trend in some agricultural markets, especially in dairy. The CAP is much more market-oriented than in the past, with the end of past mechanisms for production control, such as dairy quotas and (from next year) sugar quotas, and wine planting rights. This greater market orientation comes with advantages, but also leaves European farmers more exposed to fluctuations on world markets. How does the Commission ensure that the long term effects of political decisions such as trade sanctions are accounted for in the development of agricultural policy? The WTO provides the overall framework for rules governing trade policies, and procedures to address disputes surrounding disagreements on whether WTO members do not follow from these rules. This does not exclude, of course, that trade sanctions or trade bans, sometimes linked to foreign policy issues, are introduced.

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DG AGRI, European Commission — Written Evidence The Russian import ban introduced in August 2014 on most agricultural products coming from EU, US, Australia, Canada, Norway, and still in place today, is such a case, and the answer to your question is provided by the response of the Commission. The ban was introduced in the peak of the season for fruits and vegetables, in a bumper year for cereals and milk production. After an initial period of turbulence, it was possible for most products to find alternative destinations. Only very limited quantities of perishable fruits were stored or withdrawn from the market. However, despite the fact that the overall export quantities remained high, prices declined and had a serious impact on farmers' incomes. A number of emergency measures were introduced, including a temporary exceptional aid to milk producers for Baltic countries and Finland which faced the most severe effect due to their proximity to the disturbed market outlet, showing that the existing legislation, which was revised in 2013, now provides the necessary flexibility for limited and targeted ad hoc support in exceptional situations. Should risk management measures be proposed by Member States to complement the CAP, or should the Commission be taking a lead? There are measures that should be left at MS to address, on risks that are clearly specific in nature to the particularities of MS and/or their regions (such as the exposure to risks linked to the weather or diseases). How to address risk at the EU level should depend on the type of risk that is EU-wide, such as market risks (linked to the Common Market, with its internal and external dimensions) or broader environmental risks (with the best example being the impact from climate change). Management of market risks and land management risks should not be viewed in isolation of the multitude existing measures, and of their impact. We analysed (both for the HC and for post-2013) the impact from running an EU-wide scheme, and the conclusions were the same – such a scheme would be costly to run at an EU-level (requiring significant cuts in existing programmes) and would result in a significant shift of funds from among MS and sectors. We are updating these analyses on the basis of the new price level. The Common Agricultural Policy - Risk Management Toolkit We are aware of the risk management toolkit contained within the CAP. Can you describe its main features? Rural Development support under the risk management toolkit covers: i. ii.

Financial contributions to premia for crop, animal, and plant insurance against economic losses incurred by farmers due to adverse climatic events, animal or plant diseases, pest infestation, or an environmental incident; Financial contributions to mutual funds (a scheme accredited by the Member State in accordance with its national law) to pay financial compensations to farmers, for economic losses caused by adverse climatic events or by the outbreak of an animal or plant disease or pest infestation or an environmental incident; a. In both cases, these measures aim to address risks related to natural uncertainties. 130 of 373

DG AGRI, European Commission — Written Evidence iii.

an income stabilisation tool, in the form of financial contributions to mutual funds providing compensation to farmers for a severe drop in their income; thus the income stabilisation tool (IST) acts as an income safety-net.

Affiliated farmers can receive compensation for a drop in income at farm level that exceeds 30% of the average annual income [in the preceding 3-years period or a 3-year average, based on the preceding 5-year period excluding the highest and lowest entry. Payments from the IST to farmers shall compensate for less than 70% of the income lost in the year]. To render this scheme compatible with WTO Green Box provisions, the possibility to target specific sectors was excluded. EAFRD financial contributions (set at a maximum of 65%) shall only relate to:   

the administrative costs of setting up the mutual fund which executes the IST; the amounts paid by the mutual fund as financial compensation to farmers; interest on commercial loans taken out by the mutual funds for the purpose of paying the financial compensation to farmers.

How many Member States have availed themselves of these tools? So-far the actual uptake of these Risk Management tools in the new programming period 2014-2020 could be considered as rather limited. 12 out of 28 Member States have programmed the whole or part of the risk management toolkit for a total public expenditure of EUR 2.7 billion targeting 644,487 farmers. A large part of this is programmed under the Italian, French, and Romanian RDPs. A further breakdown shows that €2.2 billion is allocated to insurances premiums (12 RDP's), €357 million to mutual funds (3 RDP's), and €130 to the Income Stabilisation Tool (3 RDP's). Why do you think the take up has been so disappointing? Risk management has been newly introduced in the EAFRD. It appears that Member States are somewhat reluctant to programme it. In some cases it concerns a cultural shift to more sector involvement in managing risks. What changes could be made to the toolkit offered under Pillar 2 to increase Member State take-up? This is one of the main issues we would have to address when evaluating the implementation of the new RDPs. Is this due to administrative complexities or to the unattractiveness of the scheme when compared to the pros and cons of other existing measures addressing incomerelated risks? At this stage, it is too early to tell. The Common Agricultural Policy – Direct Payments We have heard mixed opinions about the role that Direct Payments (under Pillar 1) play in bolstering agricultural resilience. Some argue that a guaranteed

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DG AGRI, European Commission — Written Evidence income protects farmers from market volatility, whilst other argue that it disincentives innovation and forward-thinking. What is the Commission’s view? The introduction of decoupled direct payments, in practice guaranteeing an EU wide minimum level of basic income support, has played a key role in maintaining agricultural activity throughout the EU territory (implying also the social and environmental benefits from this). Market signals help producers, and the agricultural sector, in orienting their production decisions, but markets are not perfect. And farmers face other issues which are beyond their control – most notably the increasingly unpredictable weather conditions, but also the cost of various inputs which may vary according to the oil price or exchange rates. Direct payments provide farmers with a stable income layer that is independent from market fluctuations, thus reducing income variability. With a short-sighted interpretation of price signals, the economic cost of agricultural production may be minimized but farming may not be kept sustainable for the long term in a resource constrained world. This was the basic reason why European agricultural policy has shifted from strong market management with high support prices towards a flexible system consisting of direct payments complemented by a market safety net. This shift in the CAP reflects a policy choice as a response to a long-standing farm policy dilemma: which is better, to support farm income directly, or do so indirectly via price support? With the lion’s share of current support fully decoupled from production, the EU’s policy response has been gradual, but clear and consistent. Direct payments allow the clear transmission of market signals, a key element for the competitiveness of the agricultural sector. Market measures, which used to be the most important tool of the CAP in the past, now play a role of last resort, when market conditions become adverse and prices collapse. Use of public intervention and public support for private storage is the exception rather than the rule. Thus the policy has gradually shifted from the concept of a safety net based on targeting price signals towards one targeting farm income, and the recent measures in support of the dairy sector reflect this. Farmers are also encouraged to share responsibility in managing specific on-farm risks. Member States have the possibility to design tools to support farmers through support for insurance premiums, mutual funds or an income stabilisation tool. Private initiatives that share the risks between farmers and processors or within producer organisations are also being promoted, but the improvement in the transmission of price signals along the supply chain and better farm organisation is essential to assure a fair distribution of risks along the chain and the viability of the agricultural sector in the agri-food sector. The most important change in the CAP in the past 25 years is the reorientation to a philosophy of policy support away from price support. This policy approach sets the CAP apart as a comprehensive tool to meet the challenge of market volatility in the short, medium and long term. It also reflects the unique institutional framework in which the CAP is grounded, a common policy implemented across a multi-level governance structure. In practice, targeting prices implicitly increases prices, thus providing incentives for overproduction, which leads to further price declines and, at the end of this vicious circle,

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DG AGRI, European Commission — Written Evidence demands for volume controls. This recipe may temporarily work for small or isolated countries; but it fails to stabilise income in more open economies. Given that there is a gradual move away from Direct Payments, what will be the effect on less efficient and more vulnerable agricultural operations? Should the market be allowed to dictate which farms survive or should the CAP be supporting all farms through Direct Payments, regardless of productivity or business success? The objective of the current system of Direct Payments goes far beyond a pure income support policy tool. Established as an EU-wide and area-based has made it possible for the legislator to introduce other important policy objectives (such as the provisions of public goods) as a pre-condition in order to receive support. Decoupled from production decisions, these payments create an incentive for agriculture to provide a combination both of private and public goods, with the latter further enhanced in the more recent reform by making 30% of the payment conditional on greening practices. However, the (in particular mainly voluntary coupled) direct payments are also there to foresee the possibility for Member States to maintain agricultural activity in certain areas, where without such an additional support, the agricultural production would be jeopardised/ disappear with the corresponding negative social and negative consequences as result. Research and Innovation How is the Commission supporting research and innovation in agriculture? The European Commission supports research and innovation through the Framework Programme for Research and Innovation Horizon 2020 and the CAP. In Horizon 2020, activities take place in Societal Challenge 2 and the budget available for this financing period is roughly double the amount from the previous period. Horizon 2020 supports transnational collaborative research and innovations actions. Innovation is boosted with the so-called European Innovation Partnership "Agricultural Productivity and sustainability" (EIP-AGRI) which is implemented by both policies. In Horizon 2020, the EIP-AGRI is implemented in projects through the multi-actor approach which involves all concerned actors. In the CAP, the EIP-AGRI is supported mainly through the Operational Groups in the Rural Development pillar of the CAP. OGs are projects set up to implement innovations. Around 3 000 such projects are programmed at EU level for the period 2014-2020. Can you give specific examples of how research and innovation is bolstering agricultural resilience? A large range of research and innovation projects make contributions to increase agricultural resilience in the following priority areas:

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DG AGRI, European Commission — Written Evidence (a) resource management (preservation of fertility of soils; water management under scarce conditions - south of Europe for instance); (b) crop and animal pests and diseases with systems-based approach (such as One-Health), disease prevention, dealing with emerging risks; (c) research on mixed farming systems; (d) socio-economic projects regarding approaches to cope with risks; (e) monitoring of agricultural production and food security through earth observations, etc. Is there a need for greater public funding in this area, including EU research programmes and funds? Interest in agricultural research in Europe came to the foreground when the commodity crisis took place in 2007/2008. However, public budget devoted to agricultural research in Europe still fall short of the challenges of sustainable food security. This is compounded with several Member States having cut national research spending in the last years owing to budgetary constraints. Research at the EU level plays a very important role even if it represents only about 10% of public agricultural research by Member States. Given the challenges to be faced by agro-food systems in the coming decades, the present levels of investment in agricultural research and innovation at member States and EU levels are still considered insufficient (see SCAR foresight report or UK foresight "the future of food and farming")16. For the sake of comparison in 2011 the EU represented 15.4% of global public research spending, the USA 10.1% and China 23.6%. Research and innovation investments in agriculture are not just crucial for sustainability of agro-food systems in Europe but also for their competitiveness on global markets. Knowledge Sharing and Information How is the Commission working to encourage farmers to participate in information and knowledge sharing activities? In the era of a knowledge-based economy, adequate education and development of skills as well as timely access to information can make a difference in the performance of any economic activity. The same applies for the agricultural sector. Timely access to knowledge can make a difference on farmers' decision making. Rural development funds provide support for knowledge transfer and information actions, including training, coaching, demonstration projects, as well as farm visits and exchanges, to help farmers improve their performance. It is expected that 3.9 million participants around the EU will be trained in the next years. As each farmer has different needs, specific advice is also planned under the EAFRD. Until 2020, 1.4 million EU farmers can benefit from the professional expertise of advisors who are regularly trained to ensure the quality of the advice. 16

The UK foresight "The future of farming" (2011) called for increased efforts in agricultural research: "There is a strong case for reversal of the low priority accorded to research on agriculture, fisheries and the food system in most countries. Countries such as China have demonstrated the effectiveness of agricultural research in raising productivity" (p. 11).

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The European Network or Rural Development as well as the Network for the European Innovation Partnership are dedicated tools to provide information and share experience and knowledge via the respective seminars and workshops as well as information disseminated via the respective websites. Do young farmers have different skill requirements to protect themselves from price volatility and to cope with the technological and commercial challenges of modern agriculture than other farmers? It is not so much the requirements but the skills that are different. Young farmers are more educated and more open to new technologies (this was also very evident in a Seminar we organised at the margins of Expo Milan for young farmers). Yet their biggest challenges are not so much technological as linked to access to land and capital. Young farmers tend to be better trained than the rest of the farming community. However, our last data confirm that there is still room for improvement: in fact, 60% of the youngest farmers have only practical experience17. Due to this situation, we pay specific attention to the training needs of the young farmers. Latest research confirms that, indeed, young farmers are more eager than the rest to develop all entrepreneurial and managerial skills such as marketing, financial, communication, networking and management skills. These skills are essential to guarantee the long-tern viability of their farms and cope with the economic challenges that will face in the future. The access to this new type of training needs need to be taken into account by the national and regional authorities when financing knowledge transfer and information actions foreseen in the Rural Development Programmes. What is the role of new technologies and social media in informing farmers of the latest research findings and innovative farming techniques? New technologies and social media play a key role in narrowing the knowledge gap between theory and practice. Essential, especially for younger farmers. However, one needs to keep in mind that this requires broadband access to rural areas. Our recent experience confirms that farmers learn most from other farmers and “face to face” contact remain important in the knowledge transfer. In this sense, we think it is important to combine traditional channels of communication with exchanges using ICT tools such as social media, web fora etc. There are indications that the Agricultural Market Information System (AMIS) recommended by the G-20 has improved market transparency – and probably limited an adverse market reaction to fears about a possible US drought (stoked in the media in August a few years ago).

17

Eurostat's Farm Structure Survey 2013

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DG AGRI, European Commission — Written Evidence The Commission is looking at ways of improving market transparency – and now publishes a series of market indicators, based on submissions from the Member States. There is room for improvement in the speed and accuracy of the information, but we have made a start. We have been told that the public policy should support the professional development of skills to help farmers cope with the move to free markets and to help farmers keep pace with an evolving CAP. Do you agree? What should such a policy look like? Skills development and life-long learning are essential to help farmers adapt to changing situations in the agricultural sector and in the world markets. Rural development policy promotes this continuous professional development through knowledge transfer activities such as training, coaching, demonstration actions and visits as well as through the provision of specific advice tailor-made to the needs of farmers. In order to provide a good service relevant for the farmers, these actions should be practical and clearly targeted to a specific need. The Role of Insurance In certain other countries around the world, there has been a clear shift to insurance mechanisms supporting agriculture, in the place of direct support. Mr Haniotis, some years ago you were the Agricultural Counsellor of the European Commission’s Delegation in the United States, a country in which agricultural insurance is common. What is your personal assessment of the success of insurance as a risk management tool? In reality we do not see a trend around the world in shifting support toward insurance mechanisms. Rather we see a clear trend in the US in doing this. In fact, direct support to agriculture has been implemented in those countries where budgetary outlays allowed them to do so as it shifts the burden away from consumers to tax payers (this is why, apart from the US and the EU, it is essentially Japan and Switzerland that have used such schemes). When comparing US agricultural policies to EU ones, one should clearly keep in mind the very significant institutional, budgetary and structural differences that exist between the two partners. US agriculture is characterized by a legislative process whereby the representation of farm interests in one legislative body is disproportionate to demographic reality, no budgetary constraint exists on farm policy implementation, and the agricultural sector is essentially supply-driven, relying on land abundance and on primarily bulk commodity production. It is thus rather simplistic, naive and deceiving to consider that such a comparison could be useful for EU agriculture. Although it is true that recently 60% of US payments go to risk management schemes, more than 90% of these payments go to just three crops, maize, wheat and soybeans, and the percentage of payments going to insurance can be expected to shift substantially every year when prices decline. 136 of 373


What assessment has the Commission made of the general trend displayed in other countries of a shift from direct support to insurance? The assessment we make relates to US farm policies, as they are the only ones with this characteristic. US policies are also complementary to each other, reflecting a very different philosophy than the one existing in the EU. Whether it is through counter cyclical price support or insurance schemes, US farm policies allow part of US agriculture (mainly the grain and oilseed sector, dairy and sugar) to insulate itself, in the short term from price signals. What matters is the result of such policies. Comparing farm income developments between the EU and the US during the last decade of price turbulence gives a very clear picture. EU farm income has been less volatile, and has declined significantly less than US farm income in recent years. This is not an accident, but the result of a different policy design – one that helped turn the EU into a net agri-food exporter during the same period. The result is that the inevitable adjustments to market realities comes later and is steeper than the reality of EU agricultural adjustment. The latter, by spreading support over the whole agricultural sector reflects changes within products that smoothen out market adaptations and allow less income volatility than in the US. Access to Finance and Financial Instruments Commissioner Hogan has repeatedly emphasised the role that Financial Instruments can play in supporting farmers. What are these Financial Instruments? Have they been widely adopted? Financial instruments are the key tool for leveraging and revolving the Rural Development budget. Overall, loan and guarantee schemes are under consideration, with a preference for guarantee instruments. The Commission has worked closely with the EIB to develop schemes that reflect the present and future needs of our farmers, foresters and related rural businesses. We have already developed a guarantee scheme for farmers. A new model for a Loan Fund under the EAFRD with price adjustable mechanism and a new scheme for the forestry sector will be developed this year. For all European Structural and Investment Funds, the Commission aims at doubling the use of financial instruments (FI) in the 2014-2020 period compared to 2007-2013. As regards Rural Development, we are well on track to meet this target. In the current programming period (2014-2020), FIs are already fully programmed in 7 RDPs in 5 Member States (FR, NL, IT, EE, RO).

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DG AGRI, European Commission — Written Evidence Further 20 RDPs in 8 MS (FR, HU, IT, PT, ES, DE, SI, LT) contain programming provisions on FIs, including respective budgets included in financial plans, while not yet providing for full FI programming. What is the role if the European Investment Bank in this area? Dairy UK told us that the European Investment Bank has entered into a joint initiative with your Directorate General, DG AGRI, to allow farmers greater access to cheaper loans that could be integrated into the Rural Development Programmes of EU Member States. Can you tell us more about this? In July 2014 the Commission and the EIB signed a specific Memorandum of Understanding (MoU) on our co-operation in agriculture and rural development within the EU. We have been working well together to promote this Memorandum and the potential of the Bank. The main objectives of the "EC – EIB Memorandum of Understanding (MoU) in agriculture and rural development within the EU" are: i. ii. iii. iv.

To support MS with the implementation of the EU rural development policy, in particular through financial instruments; To outline and made visible the actions that the EIB is undertaking for MS in relation to rural development and the EAFRD implementation; To enable the dialogue between MS, EC and the EIB on the various MoU products and the future of FIs under shared management To raise awareness on the activities by both institutions of common interest and in particular in the field of financial instruments and funding agriculture.

What is your opinion of the United Kingdom’s record in this area? Has the Department for Environment, Food and Rural Affairs taken up these opportunities? At the Commission we are aware that England is still considering introducing in the Rural Development Programme (2014-20) financial instruments. In the current stage, no substantial concrete progress has been reported to the Commission. However, in has been confirmed that the introduction of financial instruments is a political priority for Defra authorities. As regards Scotland, some progress has been reported on the introduction of Financial Instrument in their Rural Development Programme by officially asking EIB in August 2015 to undertake the ex-ante assessment. Public Policy and the Future of the Common Agricultural Policy What consideration has been given to risk management measures when thinking about the 2020 CAP reform? A great deal, with the discussion taking place in the context of a commodity price boom, where output prices increased significantly, but less than costs. Amongst the various options 138 of 373

DG AGRI, European Commission — Written Evidence we analysed, risk management, especially in the form of income insurance schemes, was considered both in preparing the Health Check and during the recent reform. The conclusions of such analyses were that the introduction of an EU wide insurance scheme in the EU would imply a significant budgetary cost (and therefore cuts in other parts of the agricultural budget), and significant transfers among sectors and Member States. When we analyse risk measures related to whether our animal and plant diseases it was considered that such challenges are best addressed at national and regional level because they are much more specific and different. This is why the risk management tool kit is with a second pillar which gives more flexibility to Member States to address their priorities. The Department for Environment, Food and Rural Affairs told us in written evidence that “… during the CAP 2020 negotiations the United Kingdom argued that [the measures contained within the risk management toolkit in Pillar 2] were more appropriate to Pillar 1 and should be regarded as a possible alternative to direct payments.” Does the Commission support the view that risk management measures should gradually replace the direct payments in Pillar 1? If not, why not? We are currently at a very early phases of the implementation of the recent reform. Therefore, it is premature to assess specific options about the future of the CAP, although clearly this option is one we will certainly analyse. What is important to keep in mind is that in the current CAP, the relationship between direct payments and agri-environmental measures has become more closely linked and more dependent on land management. It is therefore land management challenges, especially those linked to climate change that will influence our analyses in the future. What role should insurance play in the next round of CAP reform? We should first define the problem we want to solve in the EU and then decide what else we need to do. In my mind, the problem that EU agriculture has to solve does not seem to be to become again more product-specific. Rather, it is how public funds will manage to jointly deliver both public and private goods, and thus to address more specifically efficient challenges around land management. In such an approach, the complementarity and simplicity of policy measures counts. As a general principle, it should be complementary to the overall orientation of the future CAP, addressing income risks in a broader, complementary manner with market measures and land management schemes, with a clear distinction between risks that are MS or regionspecific, and can thus be better targeted with national (in their design) measures, and risks that are EU-wide, and should be best dealt with based on EU-wide measures that consistently address market and environmental priorities. Any redesign of risk management (for which there is clearly scope for improvement and enhancement once we get a clear picture on why existing measures have not been used very widely) should avoid simplistic comparisons and imitations with what other parts of the

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DG AGRI, European Commission — Written Evidence world, with very different institutional, budgetary and structural realities of their agriculture do. 27 January 2016

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DG AGRI, European Commission — Oral Evidence (QQ 38-51)

DG AGRI, European Commission — Oral Evidence (QQ 38-51)

WEDNESDAY 20 JANUARY 2016 11 am Witness: Mr Tassos Haniotis

Members present Baroness Scott of Needham Market (Chairman) Lord Bowness Viscount Hanworth Lord Rooker Lord Selkirk of Douglas Lord Trees Viscount Ullswater Baroness Wilcox ________________ Examination of Witness Mr Tassos Haniotis, Director, Economic Analysis, Perspectives and Evaluations; Communication, DG AGRI, European Commission

Q38 The Chairman: Good morning, Mr Haniotis. It is very nice to see you again. Thank you very much indeed for coming over to talk to us to help us with our inquiry into agricultural price volatility. Just a few housekeeping announcements, if I may: this is a formal evidence-taking session of our Committee, and a full shorthand note will be taken. We put this on the public record in printed form and also on the parliamentary website. We will send you a copy of the transcript in case there are any minor errors, although I do not think there ever are. This is on the record. We are being webcast live and it will be accessible via the parliamentary website in due course. You have been provided with copies of members’ interests. I will remind members that if they have any relevant interests, they should declare them the first time they speak in today’s proceedings. Perhaps you could say a word or two about yourself and your role in DG AGRI for the record and the Committee’s information?

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) Mr Tassos Haniotis: Thank you very much. Thank you for the opportunity to provide evidence on this issue. I am Tassos Haniotis. I am director of economic analysis, perspectives and evaluations in the directorate-general for agriculture. My directorate deals with issues related to the preparation of CAP reforms, market analysis and statistical information, and the monitoring and evaluation of the common agricultural policy, and for the last year and a half we have also had the communication unit included. One of the main areas we have covered in the last four or five years has been the analysis of the causes and impact of price volatility and the turmoil in certain markets and what impact this could have on policy design. The Chairman: Thank you very much indeed, that is very helpful. I wonder if I could start from there and ask you to outline for us how you see the trends in recent years on agricultural volatility, whether they are getting more extreme, and so on, and whether or not you think the situation is worsening and becoming more difficult to manage? Mr Tassos Haniotis: One thing that is clearly taking place is that the situation is changing. What we have seen in the last eight years is really exceptional. We have had two major spikes of commodity prices and two major troughs. In fact, we do not know where the recent one is going to settle. This has never happened since the Second World War. In fact, it has probably not happened in the whole of the 20th century, but we do not have accurate data throughout this period. What characterises this period is not only the issue of volatility. From the start we have to be clear about one fact: volatility is not unknown in agricultural markets. From the moment that you have continuous food demand on a daily basis and a discontinuity in supply, because naturally we have an annual cycle of crop commodities, price volatility is something that we have been accustomed to. What has been exceptional is we have seen periods of extreme volatility, but also periods that are characterised by two other parallel phenomena. One is what we technically like to call co-movement, which is the parallel movement of all commodity prices, up and down, regardless of the fundamentals. Energy prices play a major role, and it is not only crude oil; natural gas has played a very important role in recent years, and also commodities and raw materials from iron ore, for example, that were used in the very rapid growth in China. We have seen another development, which is that the level of prices of all commodities, and especially agricultural commodities, has stayed way above what one would call its historical average. Today, as we speak, after four years of continuous

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) decline in agricultural prices, they are still higher than one would have expected 10 or 15 years ago. It is these three parallel developments that make this situation pretty complicated. Since last year we have started analysing the causes of what is happening. To summarise a pretty long story—and we have already put copies of analysis we have done in the mail for you, and it is publicly available—what characterised recent developments was not demand driven in agriculture. Clearly, the world population is growing, world income is growing, and food demand will also grow, but it does not grow in such impressive ways as people would have expected or as is published on the front pages of newspapers. What is more interesting is that food demand changes take time to alter dietary patterns, and that allows people to foresee it. What happened was we had a very long period of underinvestment in agriculture, which resulted in problems in supply, and then markets overreacted. They did not only overreact in agriculture; it seems they have overreacted in a series of other commodities. We might be entering a period now where the slowdown in the world economy, especially of emerging economies, of the oversupply of energy and the transformation of the Chinese economy into an economy that will not be driven so much by investment but by domestic consumption, might introduce a period where prices will stay lower than we expected only a few years ago. That generates uncertainty and the possibility of volatile periods. This mixture makes the design of future policy options more difficult than in the past, because we have many areas of uncertainty on the horizon. Q39 The Chairman: I would just focus on China for a second. From your point of view, how easy is it to collect robust data from China, which is notoriously closed? Do you feel able to comment on that? Mr Tassos Haniotis: In the context of the G20 we have introduced this Agricultural Market Information System and have an annual meeting of the Rapid Response Forum that discusses these types of issues. Regarding transparency in the areas where we have focused, which is mainly wheat, maize, rice and soya beans, it is clear that the information has improved in recent years. Where it is not as good as we would have liked is in the area of the level of public stocks. We are not sure that this is as a result of an unwillingness to provide information, although it is clear that different parts of the world consider stocks much more strategically. It is also partly a problem that exists on the ground in getting accurate information. We are trying to crosscheck this type of information with other data, for example, on demand patterns. We know

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) that demand for meat is growing in China. We know that imports of feed for animals is also growing. If you put these things together and have seen consistencies, implicitly you can improve the data you have. We are better than we were when we started this discussion six or seven years ago, but still there is plenty of room to go. What we have proposed in this AMIS group is to expand information and to cover the livestock sector, because this is crucial in allowing us to understand what is happening in other areas. The Chairman: Thank you. The final introductory question from me is to go on to another specific issue, which is the impact of political decisions, such as sanctions. We heard quite a lot from the dairy industry about the impact that sanctions on Russia have had. I wonder what you would say about the extent to which you are able to plan for the impact of some of these decisions that are made for other reasons, and always will be. Mr Tassos Haniotis: It is true that you can never plan for events that are driven by other factors. What you can do is assess the impact of these events. In our annual exercises, we assume that sanctions, for example, will go on for another year and then gradually move out, but we do scenarios of what happens if sanctions continue for a longer period of time. What is interesting in the particular case of sanctions in Russia is what actually happened in EU agricultural exports. That does not only show the problems and challenges we face, but also the opportunities. What was surprising to us was the fact that overall EU agricultural exports increased in other markets in other parts of the world. One should not expect that this is going to happen year after year after year. Although quantities increased, the impact on prices and the value of exports was negative, and especially in certain member states that were closer to Russia and more dependent on the Russian market the impact was more severe. The only thing you can do is look at what type of emergency measures you have available, which is what we introduced, and adapt and adjust the longer-term planning assuming different scenarios. That is the only thing that one can do realistically. Q40 Viscount Hanworth: It does seem that the revisions of the common agricultural policy have increased the exposure of farmers to such volatility as may transpire. Perhaps you will comment on that in due course. The Second Pillar of the CAP offers new risk management measures. Can you describe what the main features of these measures are, and what they include and exclude? Can you give us some idea of what kind of uptake there has been among the member states of these new facilities? Mr Tassos Haniotis: These types of measures include risk management that addresses natural risks—for example, crop or animal diseases, extreme weather events, whether in the 144 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) form of crop insurance or mutual funds. That was there in the past and is there today. These are the types of measures that were available to member states and we have always considered that it is better that member states have the responsibility to deal with them because they are driven more by national and sometimes very regional challenges and priorities. The novelty in the rural development measures was the attempt to introduce an income stabilisation scheme. The income stabilisation scheme is meant to compensate farmers once they face severe cuts in their incomes. We have designed this scheme in a manner that is compatible with the so-called green box of the WTO agreement, which means you have to have severe cuts in your income to be able to receive compensation, and also such a scheme should not be sector-specific. Coming to the second part of your question, this might explain why the participation of farmers in this scheme has probably not been as important as we would have liked or expected. In the analysis we are going to do in the evaluation of the future of the common agricultural policy, we would like to see what explains the low uptake. Overall, we have 12 member states that have introduced schemes on crop insurance or management of risk through the Second Pillar of the CAP. They cover a little over 650,000 farmers with €2.7 billion allocated in these particular programmes. One has seen a significant difference in the uptake and use of risk management in Europe in comparison with the US, because of the numbers that have circulated, recently especially. We do have a risk management scheme in the European Union that is extremely important, which is called direct payments. It is a very significant part of the budget. The whole idea of this scheme is to provide a fixed part of the income of farmers year after year whereby the parts of uncertainty and volatility that are driven by markets are mitigated and minimised. That might also explain to a very significant extent why farmers might prefer this type of management of their income risks to others. Viscount Hanworth: Does the stabilisation scheme address cuts in income from any source, or does it specify the particular sources? The reason I am asking this question is that we have the impression that certain causes of volatility are simply not addressed in this scheme. Is that correct, or have I misunderstood? Mr Tassos Haniotis: It addresses a drop in income regardless of what has caused it. A drop in income could come from natural causes—a natural disaster that reduces production— from drops in prices, or a combination of effects, and it is neutral to that. It takes the overall 145 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) income of farmers and considers what happens if this drops by more than 30%. What is very interesting in this particular scheme is that in the United States, where they use risk management schemes much more heavily, they have a whole farm income scheme, which also has very low acceptance by farmers. Most of the risk management schemes that the Americans are using, and the farmers seem to like a lot, are crop-specific types of schemes and not a whole farm income approach. We have to analyse on both sides of the Atlantic what it is that makes farmers hesitate using those types of schemes. Viscount Hanworth: Could you address my initial proposition, which was the recent revisions of CAP have increased the exposure of farmers to whatever volatility may transpire. Is that true, or would you contest that? Mr Tassos Haniotis: No, I do not contest that. The whole purpose of having the CAP market-oriented was to open farmers to market signals, but not that alone. One has to see the complementarity of various measures. In the past, farmers did not have any sense of what a world market price was, because the level of tariffs was very high, the level of support prices was very high, and if something went wrong we even used extra subsidies. The world markets were feeling all the risk that was coming from our policies and not the EU farmers. The whole philosophy of the reform is that market signals play an important role that tells farmers where they can move and where they should stay out. This was done with a significant part of the income coming in the form of direct payments, which provided this cushion that mitigated the negative effects. Yes, they are more open to market signals and what is happening in the world markets, but they have responded to that. I do not think it was by accident but as a result of this policy reform that in this period the European Union became a net exporter of agricultural products, because most of what we export is valueadded. We still continue to import a lot. On balance, we are by far the largest importer in the world of agricultural products, but on the export side it is more and more value-added. That is as a result of much more market orientation. Obviously this has not happened without costs, but it also brought some benefits. Viscount Hanworth: I think others will pursue this theme, so I should give way. Q41 Viscount Ullswater: For clarification, when you talked about what farmers prefer, which is this cushion, this direct payment, are you talking about Pillar 1, the basic farm payment, and should that continue, or are you talking about part of Pillar 2?

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) Mr Tassos Haniotis: I am talking about the basic farm payment. In the past, especially in the reform of 2003, the logic was to have income support covering the bulk of the payments in the First Pillar and having agri-environmental measures in the Second Pillar. We discovered that agri-environmental measures covered a little over 20% of land. What we saw in the aftermath of the first commodity crisis in 2007-08 was that the agricultural prices increased significantly. Normally one would consider this a blessing for farmers, but costs of production increased even faster, whether it was fertiliser or energy. The result was that this put the farmers into a peculiar situation, a real cost squeeze. From a short-term point of view, to maximise their profits or minimise their losses, the farmers would not have any incentive to pay for the environment, and the markets do not pay for the environment. In the longer term, this was considered to be potentially disastrous. What we tried to do and still try to do in the design was bring together these two elements in a complementary manner. Farmers produce public goods, but they also produce private goods. Instead of pitting one against the other, we want to bring those together in a complementary way. In this design, even for the future, they need to have some cushion in the overall income of farmers that would compensate them for what the market does not compensate. That remains important. One would have to examine whether the manner in which we distribute payments in the reference we have, which is land, is the most accurate one. In my view, that is where the discussion in the future will have to focus. Q42 The Chairman: The toolkit to help manage volatility is focused on Pillar 2, and, therefore, focused on a certain sort of cause of volatility, and it is not really a toolkit that is fit for purpose for the sorts of volatility you described at the outset, which is much bigger market-orientated volatility. Is part of your thinking that at some point there needs to be a Pillar 1-type solution and if you wanted to move to insurance models to cover the volatility that you have described you would have to think about that in Pillar 1, because, frankly, Pillar 2 is not big enough anyway? Mr Tassos Haniotis: I think we should realise that the old distinction between Pillar 1 and Pillar 2 is becoming less and less relevant. This distinction was driven by the fact that in Pillar 2 we had—and still have—multiannual budgeting based on programming, and on Pillar 1 it is annual budgeting and there is no programming; it is all financed by the EU. Now we have elements of programming and co-financing in the First Pillar, but the most important thing that brings these two together is land management.

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) If you look at the manner by which the CAP has evolved over the last 20 years, we moved away from product support towards producer support, and now we are moving more and more towards land management. The overall objective of the policy is the one that, in my view, is going to determine in the future how we design what we design. We have to agree among ourselves the type of priority we have regarding supporting it. Do we want to support products? Most of the design in US farm policies is still around product support, commodity support, and basically three commodities: wheat, soya and maize. We moved away from that and we had support for more products than those in the crop sector; we had it in the animal sector, and will continue to have it. We moved towards support for producers. After a period of transition, we now know that land management is becoming extremely important. The climate change challenge is the one that will determine to a large extent the additional types of risks that we have to manage and the types of instruments that we need to put together. It is important to start realising that for the same piece of land—one hectare of land, for example—you can see differently from a market point of view the quantities you produce and what impact it has on prices; from a direct payments point of view whether the CAP will support it and how much; from an agri-environmental point of view what type of additional measures you have; from a control point of view how you guarantee this is accurately accounted for; but it is still one hectare of land. The crucial question is what type of land, what are the soil characteristics, what do they imply regarding future environmental challenges, be it climate, soil erosion, water use, or what have you, and how all the measures that we have—and they are and should continue to be more than one—would act in a complementary manner. This is where research, innovation and the transfer of knowledge through the advice systems plays an extremely crucial role. The Chairman: I think you have begun to touch on the area that Lord Rooker would like to explore. Thank you for that. Q43 Lord Rooker: Thank you for coming. The point you made earlier about the EU being a net exporter of food is very significant; that has not been the case before. On the direct payments, we have had mixed evidence. On the one hand, they will support the farmers, as you rightly say, but, on the other hand, they are a barrier to innovation and change. Do you have solid evidence? You talk about marrying the two together in a way that they have not been linked before, continuing direct payments, that we can still get improvements in productivity, and that we have to improve yields. We have had evidence that it is a barrier 148 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) to farmers who want to innovate simply because there is a bedrock of payment that supports the inefficient farmer who does not want to make any productivity payments. What is the reaction to that argument? We have had mixed opinions in both directions. Mr Tassos Haniotis: The mixed opinions are a reflection of a pretty complex situation on the ground, which has also been affected by the different structures among member states and the different manners in which previous reforms have been implemented. It is interesting that an evaluation that was done about the impact of decoupled support some years ago indicated—I will not mention the names of the countries—that, with the same policy tools, in one member state you had younger farmers becoming more innovative and marketoriented, and in another one you hardly saw any change. From the country I come from, where I often make speeches, with the same types of measures you see very different situations. You see people who do not really care to do anything more, and you see others using this opportunity to innovate a lot. We have seen that, regardless of what types of schemes we have had, there is a constant path of structural adjustment taking place that seems to be influenced very little by the types of policies we have; it is more influenced by the demographics. It is important to keep in mind what happens if we do not have any support. That is the starting point. We know that if we do not have any support, then clearly we are going to have a much faster structural adjustment and much more concentration in the most productive areas with more pressure on the environment. In a sense, smoothing out the path of adjustment is something that was desired from the beginning. I would like to stress the need for complementarity of these measures. For example, we have seen criticism that the number of farmers has declined in the European Union. Of course it has declined, and will continue to decline, because that is a natural process. The important thing is what happens to the people who leave the farming sector, what types of additional opportunities are created in rural areas, whether these are linked to the food industry, which is clearly growing, whether these are linked to innovation projects that are there and spread knowledge, and whether there is a passage to a younger generation with fewer barriers. We do have some pretty interesting challenges here. At the margins of the Expo Milano we organised a seminar with young farmers this past summer. We broke them into 10 different groups and asked them all the same question: to give us the three major challenges they face. In all 10 sub-groups the first two challenges

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) were common: access to land and access to credit. This is partly as a result of the existence of the system, but only partly, because the biggest problem we have is there is no common land market policy in the European Union, which is natural because that is the responsibility of the member states, but the legislation is so different regarding taxation, inheritance, transfer rights, that it makes things pretty complex for younger farmers. Maybe that is where we need to focus much more than on the other types of areas where we face criticism. Lord Rooker: That is very interesting. The way you explain it is there is a big picture, a long-term plan to get this massive structural change, but basically we do not want to tell anyone where we want to get to; we want to do it really slowly to take the cultural change with us, to take the older farmers to keep them farming, while we bring about this massive structural change. I can quote New Zealand where they got rid of the payments and there was massive structural change. I do not think the country became a wilderness, but it did cause massive upheaval of people in jobs and communities. If everybody knew there was a plan we were working to, to get this structural change to make better use of our land, to encourage younger people to come into farming, to make it more modern, to get access to land—because it is very difficult, as you say, because they are the ones with a future who want to innovate—we would get more acquiescence from older farmers who do not want to innovate and are quite happy with the single payments. My final question is: if the market moved faster, would we be prepared to have the market dictate whether a farm should survive? The land will still be there; it is what we do with the land afterwards. We are more attuned to the market than we were before. Is there a factor that we ought to take into account when we look at our report on volatility of prices? Mr Tassos Haniotis: You raise a very interesting point. I will start with what you said on New Zealand. It is more than 10 years ago that I was invited for a formal visit for one week by the Foreign Minister in New Zealand. We had all sorts of visits; the story about the New Zealand reform was constantly coming up. At a certain point I raised the issue—and at the time we had 15 member states in the European Union, and were soon to become larger— ”You do not do those types of reforms overnight because land prices would collapse”. It was only then that I heard the story. Someone said, “Yes, this is why we subsidise the banks”. Even there, the reform, drastic as it was, did not happen without public intervention of a different type. That was in the context of a small country. It is not so much designing a long-term plan of where we want to go, but observing trends that are out there on the ground that sometimes are irrelevant to the planning we have. It is 150 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) clear that the ageing population is a fact in Europe. It is not only a fact in farming areas; it is a fact in Europe. This means that we are going to have fewer farmers in the future than we have now. This has happened in every part of the world, regardless of policies. That is something we need to tell farmers. We also need to tell farmers that we need to design the types of policies that will make structural adjustment as smooth as possible. There is no overall plan for the European Union in that. If you look at your country, or the Netherlands, or Denmark, for example, they have reached a certain point of population in the farming areas that resembles pretty much what the United States or Canada have. If you look at other parts of Europe, the parts of the population that are in rural areas are much greater. There you have to do things in a different way. This is why structural adjustment, regional funds and coherence in these programmes are extremely important. What is clear, and we saw it in the statistics, is that in the last 10 years we lost a very significant number of farms, but agricultural land remained stable in the European Union, and that is a positive thing in our capacity to have agricultural viability in the future. Q44 Lord Trees: Innovation has been mentioned, which comes to my area of questions about research and innovation. The individual farmer cannot do much about the price they are offered—volatility is a product of global events really—but they can improve their resilience and responsiveness by improving their efficiency and input costs, lowering their costs of production basically, and that has to be done by research and innovation. My question is twofold. What is the Commission doing to support research and innovation to improve the competitiveness of European farmers? Research and innovation needs to be transferred and transmitted down via knowledge exchange to the farmers, so what is the role of the EU and the CAP in helping to support farm advisory services? Mr Tassos Haniotis: Regarding production of new knowledge, which is research, we have doubled the funds to agricultural research in the current financial period—the common agricultural policy—and a significant part of these funds are being co-ordinated by DG AGRI. We have included all the priorities that we have seen are extremely important, from animal and plant diseases that are spreading faster because of climate change to issues related to food security and land management. Then comes the point of what you do with existing knowledge that reflects best practice. Here we have the European Innovation Partnership in agriculture that spreads this knowledge with our operational groups, which have this role. Then comes the point of this transfer of knowledge through the Farm Advisory System. The 151 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) Farm Advisory System is a legal obligation of member states and, on paper at least, it is everywhere. It does not exist regarding performance in the same way that it existed in the past. This is not an EU-wide problem; it is a world problem. There are emerging economies that are spending much more money on research and innovation and advice. In the developed world, underinvestment and cuts in the public sector have resulted in less quality and quantity of advice on what is necessary in the current context. In the recent reform of the CAP, these three were brought together. In my view, this was one of the most important elements of the recent reform, and probably one that we do not advertise and publicise that much. We tried to bring these together in the same way. On the ground, I would have liked to see much more transfer of knowledge among member states and farmers with similar characteristics. Linguistic differences among member states do not necessarily always help, but the fact we have taken a major step with respect to what we had in the past is already pretty positive. The monitoring and evaluation of our policies will allow us to see where there are policy gaps in areas that we can improve further in the future. Q45 Lord Selkirk of Douglas: I have an interest that is stated, a small farm and small pockets of land with a possible interest in a turbine, or turbines. The National Farmers’ Union gave us very helpful evidence. They suggested that “the promotion of business management and entrepreneurial skills is crucial to achieving a professional and more productive, profitable and competitive farming sector”. May I split my question into two? The first is: how is the Commission working to encourage the farmers to participate in information and knowledge-sharing activities? Do you see young farmers, or tenant farmers, having different skills requirements to protect themselves from price volatility and to cope with technological and commercial challenges of modern agriculture? Do they have that more than other farmers? Mr Tassos Haniotis: Again, this is an area where the Second Pillar—the rural development programmes—plays an important role. All member states have put both information exchange and training into these programmes. Generally, we have seen the younger farmers tend to be more apt, especially to new technologies, but we have also seen that many of them, from the statistics, do not have the practical experience that is necessary. There is plenty of room for improvement. What is very important is to see what other means we have available and how we improve these means regarding spreading this knowledge. This is an area where, in the world in which we are living—we keep talking about precision farming, for example, and the impact that precision farming could have in mitigating the effects of 152 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) volatility, improving productivity, and the rest—precision farming for small farmers, for younger farmers that are starting their operations, requires broadband in rural areas. You can get this information via satellite if you have the money to spend. If you do not have broadband in rural areas, the capacity to use what is much more advanced right now is not available to everybody in the same way. This is where it is not only the type of information that is available that matters, and the audience to which we need to pass this information, it is also the means we have available to do that. This is where improving the current situation in coverage of the internet in rural areas becomes extremely important, because otherwise you might have people with all the necessary skills and desire to use these new technologies, but the means necessary for them to do so will not be available. Lord Selkirk of Douglas: Can I ask two more questions? The first is about the role of new technologies and social media in informing farmers of the latest research findings and innovative farming techniques. Is that satisfactory, or should it be developed? We have been told that public policy should support the professional development of skills to help farmers cope with a move to free up markets and help them keep pace with an evolving common agricultural policy. Do you agree? What should the framework of that policy be? Mr Tassos Haniotis: Let me start with the second question. I fully agree, and it seems also that the member states agree because they have put significant amounts of money into the rural development programmes to do exactly this. This is happening. Regarding the role of the social media, those who are actively using social media do it all the time, and it is expanding. We have seen, especially in the innovation part and research projects and in all the other networks that operate, that these are used more and more. What we also see is that there is a part of the farming community, which might be even bigger in the farming community than the rest of the population because of the age characteristics, which is not using social media. That creates the risk that the knowledge gap will increase. We should not focus on only one way of spreading this type of information; we should also continue using the more traditional—old-style if you want—means of transferring this information, otherwise we risk having people completely left out from new developments. Lord Selkirk of Douglas: Do you feel that the Commission is giving sufficient guidance to farmers to adopt the best possible methods?

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) Mr Tassos Haniotis: The Commission cannot give direct guidance to farmers. First, we do not have the resources to do that. Secondly, it is the responsibility of the member states to do that. I think we give sufficient guidance to member states and have the necessary networks with member states that allow this to happen. In rural development there is experience and best practice that has been going on for quite some time now, and that is improving all the time. There is always more to do, but this is one of the areas where I think we can be proud of what is happening on the ground. Q46 The Chairman: You might not want to answer, but I wonder whether there is any one member state that is doing this very effectively that we could take a look at, or is it good and bad across the European Union? Mr Tassos Haniotis: I would not like to mention a member state here. What I would like to say is there are a few member states that are doing this well, but are doing it in different ways. For example, there are member states that are doing it through networks based on universities and research institutions; others that are doing it with their ministries; others that are doing it with farm organisations or an agricultural council. There are different ways of doing it. Yes, there are member states that are doing it pretty well. What I can say here is that a personal frustration that I have is that we do not see those that have the good practices sharing these with others; not necessarily because they do not want to, but because somewhere down the road we do not manage to spread the best knowledge. The Chairman: That is interesting. Lord Trees, did you have another question? Lord Trees: Could I follow up on spreading best practice? Farmers are notoriously secretive sometimes; they do not like to tell you how many animals they have, and so on. When we had the NFU here, we heard that one of the difficulties was perhaps farmers being reluctant to give information and data. You have an EU perspective. Is that a problem EUwide? Are member states able to gather information about the cost of production from individual farmers and collate it so that best practice can be spread both within member states and between member states? Mr Tassos Haniotis: Where we have a serious problem of collecting information from small farmers is because it is very expensive to gather. We have information on costs of commercial farmers, which represents more than 90% of production. The Farm Accountancy Data Network, although not perfect, is very good at doing that and it is improving continuously. The important thing is not only the type of information we get. It is

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) clear that farmers do not like to share this information with us—if you like, with bureaucrats—but I am pretty sure that they want to share this information among themselves. Sometimes their own networks tell them what works best, and the only thing we need to do is observe these types of changes, and that is enough for us. Q47 Viscount Ullswater: The Committee has received quite a lot of written information about insurance and the role that it could play in supporting agriculture. I believe particularly Canada and America have those sorts of schemes, and I know that you have some experience of that. I would be very pleased to hear your personal experience of what you have seen in America. That is one side. Could you elaborate a little on what might be happening in any EU country, because certainly Britain does not have this insurance available? I do not think the insurance industry would be able to support it at the moment. What might be happening in the EU? Is there a concept whereby the Commission could use part of Pillar 2 to support or underwrite insurance for countries within the EU on that basis? Mr Tassos Haniotis: I spent seven years as a graduate student and four years in the delegation in Washington, so 11 years of my life in the United States. The United States has many good things from which we can learn. Personally, I am not sure that crop insurance schemes is one of them, and I will explain why. I think it is rather simplistic, and sometimes deceiving, to try to compare US agriculture with European agriculture. US agriculture is a new world agriculture based on abandoned land. More than that, there are very significant institutional differences that are often forgotten. It is not only who has the legislative initiative in the US and the EU, and the fact that one of the two Houses in the US, the Senate, has a disproportionate weighting of farm interests to the population, which is reflected in farm policy; it is also the fact that people tend to ignore that in the United States there is no budgetary constraint on agricultural policies. There is an estimate of what the cost of the next farm bill is going to be but, if the estimate turns out to be incorrect, there is no budgetary discipline, as we have in the European Union; the Government will give all the money that is necessary. More important than that are the very significant structural differences between the United States and the European Union. You have probably seen one of the figures circulating in the last couple of days about the Americans having 1% in direct payments and 60% in crop insurance, and Europe exactly the opposite. This is totally erroneous as a comparison, because the 1% is something they have now, whereas they used to have more, and you never know how much they are going to have on an annual basis because the whole 155 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) structure of their system is countercyclical. What is more important is that the bulk of support in the United States goes, essentially, to three commodities. It used to be rice and cotton, which have become much smaller; now it is mainly wheat, maize and soya beans. In Europe, we spread agricultural support in a much broader way. Around 40% of US agricultural exports are still bulk commodities and in Europe it is less than 8%; it is valueadded. We have to ask ourselves: what is the fundamental difference? The United States has its own capacity of understanding their priorities, and it has the right to do that, and we should do the same. We should ask ourselves: “Do we want to focus on products, on commodities?”—that is what the US policy is—and if so then we should learn from them and try to imitate. Do we want to focus on producers and their income? Do we want to focus on land management? Other types of schemes might be more necessary. This is the most important aspect we need to keep in mind. I will give an example in a practical way. When I fly, I like to sit by the window. If you fly over the Midwest in the US and see agricultural land, and if you fly over any part of Europe and see agricultural land, these are two completely different landscapes. The starting point should be: what is the landscape we have in Europe, what is the tradition we have in Europe, what are the characteristics of our food industry, with all the linkages it has? Then we ask ourselves: what are the challenges we face and what types of policy instruments do we have to address them? There, the complementarity of our policy instruments becomes very important. If we want to learn something from the United States, then we should look at its research system, extension system and innovation system. This is an area where Europe has a lot to learn and apply. My personal experience—I am a product of the generosity of Americans when it comes to research assistantships; that is how I managed to study—is that this is an area we have to learn. Frankly, I am not sure that crop insurance schemes, which have a lot of administrative costs—there is plenty of literature about their weaknesses—is the best way forward. At least, it is not a way where you can say, “This is what they do. I take it and I apply it here”. My last point is that we are not the only ones that are implementing a new reform; the United States is also. We need to wait and see how many farmers have entered one or other of the schemes. They had two options. One of the two options implied they had to do a sort of forecast on their own about what the future price level is going to be. It is only when we see that implemented on the ground that we will see what the results are.

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DG AGRI, European Commission — Oral Evidence (QQ 38-51) I have one last point that I think is important. We have not finalised the results, but you will see them soon. If you look at the last 10 years of the evolution of agricultural income in the US and in the European Union, agricultural income in the European Union has fluctuated. It has declined recently, but overall it is higher today than it was 10 years ago and less volatile. The US agricultural income is at the same level and has been more volatile. If you look at the impacts and results, this tells us something about what different policy instruments are doing. Q48 The Chairman: That is really interesting and offers quite a different perspective from the one we have picked up. Does anybody want to explore further? In a sense I am paraphrasing what you are saying, but I am interested that one of the issues around an insurance model is that it is designed around the crop and not these broader issues of environmental and other management of the land. Is it not possible to design a scheme that has some elements of both, or do you always have to think about one or the other? Mr Tassos Haniotis: It is possible to design it; the thing is, who is going to finance it? It is not by accident that US insurance schemes are based on commodities, where there is a very long tradition of financial markets and of data on the ground of farmers going back to the 1930s. Nobody in the private sector dares to enter areas on plant or animal diseases. These are where a lot of risks are in agri-environmental measures where you do not have the markets providing any compensation. This is where we have to weigh very carefully what we need to do. Let us be clear, we have already started analysing what the new price level is going to be in the future and what it implies regarding insurance schemes. We have done an analysis twice. We have seen what an EU-wide risk management scheme in the European Union would cost, which would imply cuts in other parts, and would have significant transfers among commodities and among member states towards the ones that are much more volatile pricewise, but not necessarily with lower income. This was public information in the two previous reforms and it will be public information when we do this analysis in the future. Clearly, we are going to do that and will try to see whether, and why, existing schemes have not been as popular. Again, it is not one or the other measure that will magically solve the problems. It is trying to combine different measures and having a very clear definition of what the problem we have to solve is. I insist that, among ourselves, we have to decide whether we want to solve the problems of commodities, of producers or of land management. That would imply different ideas. The Chairman: Thank you, that is very interesting. 157 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) Q49 Lord Bowness: Commissioner, you have already referred to the difficulties of young farmers and finance. Can I widen that? We have received a lot of evidence on the difficulties encountered by farmers accessing finance for longer-term investments. Your colleague, Commissioner Hogan, emphasises the role of financial instruments, and some of our witnesses have spoken to us about the European Investment Bank joint initiative with your directorate, allowing farmers access to cheap loans. Can I ask you: what are these financial instruments and have they been widely adopted? Secondly, what is the role of the European Investment Bank in this area regarding access to cheaper loans? Mr Tassos Haniotis: My boss, Commissioner Hogan, has put this as one of his big priorities—trying to find ways we can leverage the money that exists to generate easier conditions of funding for farmers. We work with the European Investment Bank in trying to identify these areas. My colleagues in rural development are working on that. During this year we should have more concrete ideas. We already have a memorandum of understanding with the European Investment Bank. I do not have much more to say on the technical details, except that it has been partially introduced in rural development measures by member states. There are some member states that have included it fully into their programmes, and others that are looking at doing that. The idea is to try to provide, in the form of easier loans or guarantees from the money that is available in rural development, the possibility for farmers to get loans with better conditions. The practical implementation, and what additionally needs to be done, will have to wait for later. Once we have more information, I would be glad to provide that in a written form to your Committee. These are ongoing discussions about what exactly will happen, so I do not have more concrete data to give you, other than that member states that have introduced it. We know that in the United Kingdom there has been interest expressed by Defra and also in Scotland. Both England and Scotland are looking at ways of doing that, but it has not been finalised yet. Lord Bowness: So nothing has been taken up as yet? Mr Tassos Haniotis: Yes. Lord Bowness: I am sorry, I misaddressed you. The way you had given your evidence led me to think you must be—I am sorry. Mr Tassos Haniotis: No, please. Q50 Baroness Wilcox: I am the last one to ask you questions, so this is the time for you to relax and answer this one just how you feel like. May I say how wonderfully you have 158 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) been answering the questions so far? Your mastery of my language is wonderful. You must speak about three languages, do you not, French, Italian, English—American! Mr Tassos Haniotis: There is a fourth one in the background, Italian. Baroness Wilcox: This is public policy and the future of the common agricultural policy. It is simple question really. The agricultural sector in the EU is heavily regulated by the member state as well as the EU-level public policy, particularly the common agricultural policy, and it is always on the political agenda. I have three questions here, if you would not mind answering them. What consideration was given to risk management measures when thinking about the CAP for the 2014-20 period? Shall I give you all three? Mr Tassos Haniotis: No, I can answer this one—a lot. We took an income stabilisation scheme and applied it across the European Union. At the then price level the cost was found to be roughly €8 billion, which means in a fixed budget that €8 billion would have to come from somewhere, with a significant shift of funds in member states more heavily involved in fruit and vegetable production, which was much more volatile. The interesting feature we found then, which is not the case today, and that is why we are updating this analysis, is at that time the highest income volatility was in the sector with the highest income, which was fruit and vegetables, and the lowest income volatility was in the sector with the lowest income, which was the dairy sector. I am not sure that the dairy sector would come out as the lowest volatility right now, and that is part of the reason we do the update. We did this analysis, which is all publicly available. We did it also with the health check before the crisis back in 2006 and 2007, and we will do more again. It is on our radar screen; it is not something that we have not looked at. Baroness Wilcox: Does the Commission support the view that risk management measures should gradually replace the direct payments in Pillar 1? If not, why not? Mr Tassos Haniotis: We do not have a fixed view of what should happen. Based on what I have said so far, the first thing we have to do is identify the main challenge we have to solve. My personal view, and I think it is shared by many of my colleagues, is that in the new environment the biggest challenge we are going to face will be linked to land management issues related to climate change and also to the broader aspect by which public and private goods are brought together; what you need to do to make sure that one does not go against the other. That is where volatility and economic viability become important. Before everything else, agriculture is an economic sector, and if it is not economically viable it will 159 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) not be viable from an environmental or social point of view. That is where the focus is going to be. The focus, therefore, is not going to be in trying to see different measures in isolation as one substituting another, but how they could complement each other. For certain particular risks, risk management clearly has a major role to play. For example, certain animal and plant diseases are more prone to appear in certain regions of the Union than others. If you look at areas of, say, attacks of wolves or bears on animals, member states have different ways of addressing that. These are risks that are localised. You cannot address this risk from risk management at an EU level. There are challenges that are EU-wide and, when you have a common market organisation, market impacts take place across the EU, and climate change and environmental challenges do not recognise national or regional borders, so different types of instruments will have to be looked at, but all in their complementarity. Baroness Wilcox: Finally, should risk management measures be proposed by member states to complement the CAP, or should the Commission be taking a lead? Mr Tassos Haniotis: Both. The member states are more capable of dealing with the ones that are more national or regional. Maybe the funding could come from the Union, but rural development programmes address these issues. If we find out that there are some EU-wide types of risks that require an EU-wide approach, obviously this is what we should do, but first we have to ask ourselves what is the problem we have to solve, is it specific to a region and member state or across the European Union, and then come up with the best possible answer. Q51 The Chairman: We have run slightly over the hour, but it has been excellent evidence. Thank you for that. This may be a question I could have asked at the beginning. I am very struck by your thinking that we have to be clear about what it is we are deciding to do—whether it is about supporting commodities or farmers. I wonder what your headline thinking is on food security. It seems to me that the question of where our food comes from and how much should be produced in the EU is fundamental to that thinking about what it is we should be supporting. We are used to the idea of energy security, and we have just done quite a lot of work on that, but I do not think any of us are clear what an EU-wide view of food security would look like. Mr Tassos Haniotis: My view is that this is not an issue about how much, even at a world level; it is an issue about where and how. The “where” has a lot to do with trade, especially with the parts of the world that really have a food security problem and there is a shift of 160 of 373

DG AGRI, European Commission — Oral Evidence (QQ 38-51) population into the big cities. Different levels of prices and price volatility imply very different things in different parts of the world. When it comes to the European Union, and we have seen it in the last eight years or so with the ups and downs of agricultural prices, it is not our capacity to produce that has been put to the test—we still produce pretty much and pretty well—it is how we produce what we do that will become extremely important in the future. That is very much linked to land management and the types of answers we are going to give to the big challenge of climate change. I would like to finish by giving you an example. I do not have it visually, but the graph is public. Last year, our colleagues in the Joint Research Centre in Seville produced two maps of the European Union. I think the year was 2030. One map was using existing practices and the middle scenario of climate change, and Europe was turning browner on the map. Then they said, “Okay, now we take the best practices and transfer them to soils with similar characteristics”, and Europe became much greener than before. It is exactly this type of transfer of best practices and knowledge that should be supported by the policy design we make and that gives us an indication of what the main challenge is going to be, but also the opportunities by which we have to address it. The Chairman: Thank you very much indeed. On behalf of the Committee, could I thank you very much indeed, not just for being here today but for the quality of the answers you have given us, which were extremely clear, thought-provoking and of great help to the Committee. Thank you very much. Mr Tassos Haniotis: Thank you for the opportunity.

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European Investment Bank, Barclays Agriculture, HSBC, and NFU Mutual — Oral Evidence (QQ 64–73)

European Investment Bank, Barclays Agriculture, HSBC, and NFU Mutual — Oral Evidence (QQ 64–73) Transcript can be found under Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73)

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Farm Cornwall —Written Evidence

Farm Cornwall —Written Evidence Farm Cornwall is based in the far South West to provide a free farm business support advisory service funded by Princes Countryside Fund. We deal with all sorts of farm sizes although mostly smaller, across a broad range of agricultural enterprises. The current dairy situation is severely affecting farm businesses, to the extent that businesses prior to this current milk fall profits were good. I can give you examples without names were making profits of £40,000 plus are now losing £25,000 per quarter. For every 1p drop on 1,000,000 litres of milk sold is equal to £10,000 loss. A 1,000,000 litre farm is equal to 140 cows producing 7142 litres each, not an untypical farm. However the milk has not dropped by 1p it has dropped for some by 10p equal to a £100,000 loss. This loss in milk income is severely affecting the equilibrium of country life. The farmer and his family are under severe mental stress and many will not survive this downturn. Farm dispersal sales are up at local auctioneers, the sums owing to the agricultural supply industry must be enormous. I am told a local supply company spent half an hour on the phone and was promised £88,000 from farmers. The pressure on farms to pay this debt from ever shrinking milk cheques is enormous. As an organisation we work with these farmers advising them on dealing with creditors, bailiffs, banks and landlords. Being free means one less bill to them and also means we have no axe to grind in terms of dealing with the farm and his family. We know it is important to get know the issues surrounding the farm particularly social issues of family disputes, depression, divorce, debt and succession as without this knowledge it is impossible to understand the problem in front of you. We would seek help from FCN, RABI and Addington Fund in trying to find a solution. The farms we see by and large are farms that have been struggling for some time, however we are increasingly seeing farms that have been run well now falling by the wayside as the produce they sells sold for less than the cost of production. This issue is depleting the farms ability to invest in equipment and manpower to do the job properly. As such farmers are disolutioned, living conditions are deteriorating, and the younger family’s connection to the business is weakening as they seek employment elsewhere. As such the margin to invest in those businesses has been small indeed, if at all. Yet those farmers that are on cost plus price incentives from the supermarkets have always done well. It would be easy to assume therefore that a cost plus milk price is the answer. However there are farmers who do well without those cost plus contracts, they tend to fall into brackets of 

Very efficient high cost, high price, high production figure farms producing 10000 litres plus per cow.

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Channel island low cost producers getting an above average price

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Traditional low cost Friesian type Cows producing 6500ltres

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Block calving only cow systems.

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Farm Cornwall —Written Evidence What does not work is the high performing Holstein cows in average systems, where by the system is not supportive enough for that type of cow. As a consequence farmers are always pressured by vet problems, replacement rate, and milk quality issues. Recently I have assisted farmers to enter into dairying as new farmers, very easy to see how they produce milk at the required 22-24pence per litre price, is that these businesses are free of debt. However even these businesses will succumb to the debt ridden business because their margin does not allow any investment, so in order to invest or replace equipment the farmer has to borrow and so their cost of production will rise. Another issue is for too long there has been a real lack of investment by Government in decent research, such as that provided by the Experimental Husbandry farms coupled to a unbiased advisory service ADAS. What happens now is all the advice is provided by the salesmen, farmers are led or pushed into systems of rearing which are not suitable, expensive to run for a large number of farmers. I remember one farmer telling me he had spent the previous evening selecting the bulls he wanted but knew the following morning when the semen salesman turned up he would buy what he was advised too. The average age of 58 years has created a situation where by farmers are reluctant to change, their children have been discouraged by lifestyle, price and wages paid that there are better industries to work in than agriculture and have gone elsewhere. At a farm meeting with the semen salesmen I was told the genetics industry was now 10 years ahead of the systems that prevail on many farms and that those cows had become unsuitable for those farms. Yet still the push was to sell these cows because as a business they need to shift all that semen they had collected. I spoke today with a cauliflower grower whom for many years has grown about 40 acres of cauliflower and he is receiving 23pence per cauliflower and has also been told that he cannot send any more cauliflowers in until Monday. A block of cauliflower will be ready for picking over that period but by Monday it will have blown and be unfit for sale. Without doubt come February cauliflower will be short supply as the mild weather brings forward varieties to create a gap down the line. Instead of this farmer or another being able to benefit from this situation, the contractual prices will 42 pence per cauliflower. However the packer grower will have to fund that shortfall by buying crop from France or Spain for £1 per cauliflower plus transport then sell it to the supermarket at his agreed contractual price – less the £1 or sure. So the farmer is expected to take the troughs of marketing but the peaks he is excluded from by contractual obligations. The memorable 1976 drought when farmers bought tractors, paid debts off or purchased land on the back of high prices are gone. Not only are those assets unattainable but the peaks of the market are taken out of the supply chain however the troughs have been left in As a country Britain needs a sustainable food industry for too long commodity prices of beef, cereals, milk, lamb and many others have varied little over the last 30 years (milk price in 1990 was 19.6pence per litre and cereals were £103 per tonne). Yet cost of inputs has risen, machinery costs have escalated to point where equipment is routinely purchased on HP, no longer are farmers able to withstand that single purchase. I believe as with the smoking ban people need to be taught to see that by buying British produce they are doing the right thing in not just buying the best, they are supporting an industry, a way of life, supporting the countryside, employment. As with many industries over the past decades they have fallen by the way side ship building, coal, more recently steel. The Government is unable or unwilling to do too much to help. 164 of 373

Farm Cornwall —Written Evidence We cannot simply keep buying our food from abroad when we are able to grow it here. I see more and more land being put aside for industrial use, Solar power, Maize for Aerobic Digester Plants, large tracts of land set aside for crops like daffodils, cereals grown for ethanol production. More worryingly land abandonment as all farm enterprises become unprofitable and the farmer is now working part/full time, still lives on the farm, runs a few cattle or sheep but just enough to fit in with his/her full time job. The land surplus to the farmers needs as none of it is being pushed too hard in terms of fertiliser being spread is returning to scrub. This option is not an isolated observation. What was I believe 83% self -sufficient in the early 1980’s has slipped to 60%. Looking to farm land or buy produce from abroad to meet our needs is an option but look at the factors which could affect that decision. 

World political instability

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China’s decision to buy large tracts of land in New Zealand, Australia and Brazil for its own use not that of the local indigenous population

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Irrigated crops in dessert regions for crops like potatoes in Egypt, of milk production in Saudi Arabia growing vast herbage supplies under centre pivot irrigators which after 18 years will grow nothing once the salt has reach root level

The Government is keen to follow a policy of cheap food; in fact it encourages cheap food as means of keeping inflation under control. At what point is that policy unsustainable, I would suggest that time is now. The Government has been supportive of supermarket growth in towns and cities well beyond the actual need of the town ( Penzance has 9 supermarkets) all of those shops need full shelves, to prove or create an image of plenty when in truth to achieve that image of plenty so much of it is thrown away. The Government is encouraging of supermarkets to supply infrastructure e.g. the new stadium for Cornwall in Truro built on the back of 2 supermarkets. Yet does Truro need more supermarkets, will they bring jobs, will they improve choice- answer no to all. The Government is keen to say the Common Agricultural Policy if abandoned would make our food cheaper because of what we spend upon it. When in truth the Basic payment scheme is what keeps many farms afloat because that’s the profit as there is no margin in producing food. So no Basic payment scheme - no food. I am not sure I agree with the last statement as Government support for agriculture has not created a boom time in fact I would argue the opposite. It has stagnated agriculture by allowing the older generation to stay longer, commodity prices have dropped creating reliance upon it and the cost of entry has escalated on “entitlement or quota values”. Government support through its LEADER, Countryside Productivity and Stewardship Schemes are cumbersome, bureaucratic and tend to go to those who have access to consultants who can understand the complexities of the forms. The Future 

A less bureaucratic grant system that is available to all farm sizes

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An encouragement that not all farms have too big to be successful

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Farm Cornwall —Written Evidence 

A rural business sector that is vibrant allowing for part time farms to exist by allowing part time work in other industries or the space on the farm to do it

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Flexible tenancies or share farm agreement models and encouragement through the tax system to do so

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A vast improvement in agricultural research and a support network of advisers e.g. Adas and the EHF farms, plus a network of monitor farms

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A gradual removal of the subsidy payment directed at productivity grants but without the complexities of the current schemes.

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A workable environment scheme that encourages all not the few

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An increase in British produce on shelves/hospitals with targets to raise home production and consumption.

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An encouragement the industry is a worthy employer and has potential career for youngsters

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Look to what was done post WW11 to encourage agriculture e.g. lime subsidy

2 December 2015

166 of 373

Farm Europe — Written Evidence

Farm Europe — Written Evidence 1. What is the role of public policy in mitigating the impact of potential price volatility? To what extent should the response be a shared endeavour between the EU institutions and Member State governments? What are the differing roles of industry on the one hand and individual farmers on the other? Farm Europe agrees that price volatility drivers are indeed variable and complex. More frequent extreme weather-related events as a result of global warming, increased food demand as a result of population and income growth, and the interlinkages between commodity and financial markets do appear however to play a significant role. None of the above drivers of price volatility are amenable to appropriate mitigation by individual farmers or other agro-food actors. Therefore public policy should play a role to respond to its negative impacts. The resilience of the agricultural sector underpins the secure, sustainable and affordable supply of food to the citizens of the EU, as well as providing financial security for EU farmers. A resilient agricultural sector is one which can respond to risk effectively and take steps to mitigate the wider effects of global price volatility. The agriculture policy being a long-standing European Union common policy, the Common Agriculture Policy (CAP) should thus be the right framework for adequate policies to mitigate the effects of price volatility. The CAP cannot achieve that goal without engaging with, and delegating to, Member States authorities and private sector actors. Diverse and detailed instruments would be called upon to implement its policies, and that is best done at national or sub-national level, and with public and private actors. Public private partnerships could be a model in this area. Farmers are by far and large the most affected and interested group, and they should benefit from the mitigating measures to be applied. Farmers should also be called upon to participate in those measures to a reasoned and balanced extent. The role of industry should be to provide as far as possible stability to the farming sector, and a more balanced distribution of benefits across the value-added chain. 2. Should public policy responses make a distinction between support for the resilience of the industry as a whole, support for the resilience of specific sectors and support for the resilience of individual units of activity? It is difficult to support the resilience of the whole industry, without supporting first and foremost the individual units of activity – the farmers. In addition to that support targeted to specific sectors which face specific difficulties could be a means of increasing the effectiveness of the measures. There is no such thing as a onesize-fits-all measure, and well targeted support is more effective than blanket policies.

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Farm Europe — Written Evidence 3. Currently, what are the key elements involved in the industry’s management of price risk? What further tools are needed? Effective risk management can mitigate the adverse effects of price volatility. In the words of the OECD, “Risk management in agriculture is now an essential tool for farmers to anticipate, avoid and react to shocks. An efficient risk management system for agriculture will preserve the standard of living of those who depend on farming, strengthen the viability of farm businesses, and provide an environment which supports investment in the farming sector.” In responding to this question Farm Europe believes it is useful to distinguish between farm level and agro-industry. There are currently big differences between sectors. Those sectors who have strong cooperatives are in a very different position than those which have only private actors. The farmer owned cooperatives have to a certain extent more possibilities and means to soften the impact of price volatility. At farm level the instruments available are contained in the CAP. They concern public intervention prices for some commodities (grains, beef, dairy), which are set at a low level to make sure they are only triggered in extreme situations; support to private storage when prices fall below established levels (pork, dairy); and indirect support to producer organizations in the fruit and vegetable sectors to withdraw surplus production. In addition to these instruments there is the possibility for Member States to support insurance schemes through ‘second pillar’ funds. At the agro-industry and cooperative levels there are also some financial hedging mechanisms which are available to a few selected commodities and in a few selected markets. Currently in the EU future markets concern only two commodities and are available in only two markets– wheat (in Paris) and sugar (in London). Future markets, even if extended to other commodities, cannot but partially cover the agriculture output. For instance it is conceivable to have a future market for skimmed milk powder, but not for the highly diverse cheese production. To these limitations inherent to the instrument should be added the fact that it requires highly specialised knowledge to be used. The existing mechanisms have proven to be insufficient when crisis strike, as demonstrated by the recent crisis in the dairy sector. In particular the insurance mechanisms are too few, and too weak to provide appropriate support for sectoral price falls. At present the CAP spends 1% of its budget on supporting insurance, in contrast with 60% which are spent in direct income aids (direct payments) irrespective of market fluctuations. A new framework for strengthening insurance mechanisms, with adequate support from the CAP, is a fundamental tool to be developed. 4. What effect has the commoditisation of agricultural goods had on the ability of farmers to respond to risk effectively? How are farmers to mitigate the onfarm effects of volatile global commodity markets and currency fluctuations? Commoditisation of agriculture goods should be seen in conjunction with increased interlinkages between commodity and financial markets, and within commodity markets between agriculture and other commodities (energy, metals). 168 of 373

Farm Europe — Written Evidence

The effect of these developments has been to increase price volatility and therefore to further expose farmers to price swings stronger than what should be expected from usual supply and demand forces. The instruments farmers dispose to deal with these risks are at present rather limited – a few scattered insurance schemes, even fewer hedging instruments. Availability of relevant and accurate market information is also an area where there is still room for improvement. 5. What are the barriers to more effective on-farm price risk management, including longer term pricing mechanisms, diversification, co-operative working and leasing? How can those barriers be overcome and what is the role of EU and national public policy? It is the view of Farm Europe that on-farm price risk management is impaired by the lack of well funded instruments, in particular the lack of across the board insurance schemes. Diversification helps, but there are limits to how far a farmer can diversify operations. Land, climate, technology and capital are well known constraints. Cooperatives can help stabilize prices, but only up to the point of their financial and contractual capabilities. Future contracts are also helpful, but they are very limited in scope. Farm Europe argues that EU and national public policies have a role to play, by providing appropriate insurance schemes across sectors and countries. EU and national public policies should also set the right framework for better price transmission and a more balanced distribution of the added value in the food marketing chain. 6. How ‘fit for purpose’ are market-based instruments? Could the marketplace help to mitigate risks by providing ways of smoothing out the impact of volatility? Are there ways in which EU and national public policy could encourage, and reduce the risk of introducing new financial products? Insurance against significant price drops or crop failure could be provided through the marketplace, with adequate backing from EU and national public funds to guarantee stop-loss coverage to private insurers and to make premium affordable to farmers. Due to the very large financial requirements associated with price insurance schemes Farm Europe believes that they should be designed and supported at EU level, with CAP funding. It is unrealistic in our opinion to expect price insurance to be implemented only at national or sub-national level, as it is highly unlikely that the financial needs to cope with sharp price falls would be available. Another avenue open to market actors is to expand the use of contracts between farmers, or their cooperatives, and buyers (agro-industry, wholesale and retail), that could increase price stability and forward pricing.

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Farm Europe — Written Evidence 7. How realistic are terms for access to investment finance? What role is there for the European Investment Bank to support on-farm investment at a low cost? What other instruments could improve access to finance in a volatile environment? Investment is key to the sustainable and competitive development of farming. One of the biggest problems facing farmers that are willing to invest or have invested in the recent past is how to cope with paying back loans in a volatile price environment. Farm Europe sees the potential for the European Investment Bank to step-in and provide financial backing to lenders in the EU. The EIB could offer credit to lenders tailored to soften the terms under which farmers access investment credit. 8. What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation? National advisory bodies provide information to farmers. A case should be made for that information to include how farmers could benefit from market-based tools to mitigate volatility and increase resilience, including insurance, contracting and future markets. Also national authorities could provide training for farmers or their representatives to understand how to engage in contracting and in future markets. 9. What role should innovation play in creating a more resilient agricultural sector? Should more be invested in scientific research which could have the potential to transform agricultural practices? Innovation is in Farm Europe’s opinion a key to the future of the agriculture sector. Innovation could help farmers cope with more extreme weather events, through for instance more resistant seeds and improved soil management. To foster innovation, research is paramount. The increase in productivity has slowed down in the last decades, questioning the ability of the farm sector to satisfy increased demand from a larger and wealthier population, in particular in emerging economies. Worth underlining that the last decades have also witnessed a drop in agricultural research that needs to be reversed to provide enough food for the world increased demand. Public and private bodies, at the EU and national level, should work together to foster agriculture and food research, and to disseminate its results.

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Farm Europe — Written Evidence 10. & 11. How effectively does EU agricultural policy currently assist farmers to mitigate the impact of potential price volatility? Is there a need for management of price risk to be an explicit objective of the Common Agricultural Policy? What long term changes should be made to the Common Agricultural Policy to support the agricultural industry in responding to price risk more effectively? Should insurance schemes play a more prominent role? The current CAP attempts to stabilize farm incomes through direct income aids irrespective of the evolution of prices. As mentioned above 60% of the budget is thus spent, as compared to only 1% in insurance. In addition to that the CAP provides a number of safety net measures to some key sectors- grains, dairy, beef, pork, fruits and vegetables. However these measures have proven insufficient to address more important price falls, resulting in severe income losses for farmers on more affected sectors, which in turn jeopardizes farmers’ ability to invest and modernize and better cope with price volatility. Farm Europe defends that to increase the resilience of the farm sector explicit and strong measures should be implemented to respond to price risks in the CAP. In particular insurance schemes should become a central feature of the CAP with adequate funding. These insurance schemes should be provided at national or sub-national level, by private or public bodies, and be well adapted to farmers’ needs. They should be available across the EU for all farmers to subscribe. As said above, public funds should provide the right incentives for insurance companies and farmers to make these insurance schemes viable, and that can only be achieved with EU level support. The cost of insurance should be affordable to farmers, and insurance companies should have appropriate guarantees to cover catastrophic losses. Farm Europe sustains that progress in this direction could be made in a two-step approach. In the short-term additional resources could be transferred from direct income aids towards increased support to insurance schemes. That would require a mid-term review of the current CAP that would make it possible, by increasing the share of ‘first pillar’ direct income aids that could be transferred to the ‘second pillar’. However the CAP in the medium to long-term needs a more fundamental review. For Farm Europe there are three key objectives for a common policy – support the resilience of the sector, promote sustainable farming, and spur growth through innovation and investment in particular. It is questionable whether to commit 60% of the resources to income aids irrespective of market price fluctuations is the right way forward. In a second step, Farm Europe has thus the vision of a CAP that would be structured around these three key objectives. In that new, reformed CAP insurance schemes would be a fundamental pillar, the one that would foster resilience. 28 December 2015

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Douglas D. Hedley — Written Evidence

Douglas D. Hedley — Written Evidence 1. Price Volatility Like the EU, Canada is a major global agricultural producer and exporter. However, they have taken different policy approaches to managing risk and responding to price volatility. a) Are you concerned about the recent trends in agricultural price volatility? Do you think that the global situation is worsening? Ans.: This seemingly simply question is really a very difficult question. My simply answer is that I am not very worried about volatility in commodity prices so long as open and fair trade rules and non-distorting domestic programs are in place. My more nuanced answer is considerably longer. I start from the premise that a considerable degree of volatility in prices stems from governmental action in both trade distortions and distorting domestic programs. Equally, macroeconomic variables play a major role. Some recent examples of governmental action that has created volatility include the actions by China in altering quite substantially its purchases of feed grains, dairy products and meats. The decline in shipments to China have had considerable effect on the recent declines in prices for these commodities. These were government of China decisions, not market driven changes. Another example is the grain export embargo by the government of India (and several other countries) a few years ago leading to the price spikes, particularly in rice. Export subsidies are another cause of volatility, although the Nairobi agreement in December 2015 may eliminate this possibility for developed nations no later than December 2021. With respect to macroeconomic variables, I can point to a current example. As grain and oilseed prices deteriorated over the past two years, the impact on US and Canadian farmers was quite different. Two years ago, the Canada-US exchange rate was about par. Today it is US$0.75 to C$1.00. Since most of Canada’s large agricultural exports are denominated/traded in US dollars, Canadian farmers have not been affected as deeply as US farmers. This is really less about domestic and trade policy changes than the examples above, but these variables also affect the impact of volatility on commodity prices. I address this issue to some extent in the paper I sent to you earlier. b)

What is the impact of price volatility on the farming sector in Canada?

Ans.: With the programs established in Canada over the past 15 years, price volatility as a political concern has diminished quite substantially. For over 20 years, federal-provincial Ministers spent the vast share of their policy time on this issue. More recent experience is that it consumes very substantially less effort and time, largely because of the suite of programs in place that have seen limited and cosmetic changes since about 2004. In general, there has been a decline in governmental support expressed as percent of loss coverage particularly in AgriStability. The new government in Canada may well alter this level of 172 of 373

Douglas D. Hedley — Written Evidence coverage, although changes would not likely begin until 2018 when the current five year agreement is renewed. We will wait to see what pressures the farm community can muster. However, it is not a top-of-mind issue currently in Canadian policy debates. By using income as the principal response variable in programs, the diversification in crops has been quite remarkable in both eastern and western Canada. Equally the year to year changes in acreage demonstrate the ability of farmers to shift acreage in response to markets, not domestic programs. 2. The Canada system of support a) What are the main policy instruments and public funding available for Canadian farmers to help them cope with price volatility and enhance the resilience of their agricultural operations? What are the main differences between your approach and that of the EU? [A note has been prepared and is attached, describing the main instruments, including AgriInsurance, AgriRecovery, AgriInvest and AgriStability and there is no need to cover this again if the note is accurate. Insurance is also covered in 4 below. ]. b) Can you describe the main policy shifts brought about as a result of these measures? Ans.: Your note and the paper I sent earlier should be sufficient for this question. c)

How effective have these measures been?

Ans.: From a political and policy perspective on the approaches (whole farm programming, individual assessment of loss, limited governmental support, farmers share in the loss), there has been far less attention to redesigning business risk management programs annually than was common in the period up to the late 1990s. From an economic perspective, agricultural production and exports have increased considerably in the past ten years even with the volatility in prices through that period. Admittedly, these results were for the most part, “good” price periods. However, I do not see federal and provincial governments in Canada attempting significant changes to the general program design. The meeting in July of federalprovincial Ministers will set the parameters for the next five year agreement. 3. The Role of Income Support The Committee has received evidence on the role of Direct Payments in supporting farmers’ incomes under the Common Agricultural Policy (CAP). Some argue that a guaranteed income protects farmers from market volatility, whilst others argue that it disincentives innovation and forward-thinking. a) Has Canada used forms of direct support to farmers? If so, what were the effects of the withdrawal of this direct support? Ans.: The “direct support” program in Canada is currently the AgriInvest program, originally Net Income Stabilization Account (NISA) started in 1991. It was officially terminated in 2004, although the Harper government re-introduced the program as AgriInvest about 2006 with considerable changes in the rules from the NISA program (lower levels of coverage, more flexibility in withdrawals, etc.). While it has considerable support from the farm community (and there will be pressure to enrich the program in the next agreement), and the WTO 173 of 373

Douglas D. Hedley — Written Evidence Agreement on Agriculture certainly allows for (encourages?) such a program, the economics behind it is remarkably thin, to say the least. Furthermore, there is no identified “risk” associated with the program; that is, it is not targeted to a specific risk or risk profile. This makes for great difficulties in proposing the programs and its costs to The Treasury Board in Canada (all programs have to be justified to The Treasury Board for approval and funding). Equally, it treats farmers differently based on the net margins by commodity. An example will suffice. In cow-calf operations the margin (gross revenue less (selected) variable costs is very high, so AgriInvest offers a very small top-up to margin. In the cattle feedlot business, margins are exceedingly small, so the program can be a significant addition to feeding margins in a given year. One other aspect is that farmers are not requested nor expected to do anything different for receipt of the funds. There is no quid pro quo. Even with the issues of environment and climate change in agriculture rising in importance, farmers are not faced with meeting criteria that reduce the environmental footprint in the program. The withdrawal of the program would have very limited impact on the economic health of the agricultural sector. One percent of the gross revenues of an individual farm (the value of the program to an individual operator) is far less than the normal, annual variability in prices/revenues across the agricultural sector. The primary impact would be the political fallout from program elimination. Withdrawal of the AgriStability program would create much greater impact. Let me distinguish between idiosyncratic risk (the risk of errors by the manager of a farm) and more general area wide or crop yield and price risks. Continued errors in individual farm management (idiosyncratic risk) lead to decreased Olympic (not “Olympian”, in WTO jargon) averages over time. This results in either the farm slowly going out of business or substantially reduced support from the program over time. Without the program, the results of individual farm management errors are absorbed immediately. The result is the same with the program but the results are felt much more quickly without the program. (I can point out that theory tells us that underinvestment tends to occur in cases of volatility in overall returns to an enterprise or industry. This has been the primary argument for some type of program that allows for adjustment over time, rather than immediately absorbing an annual loss.) For the more general risks affecting crop prices, wide spread disease impacts, etc., the program allows a period of adjustment to new price levels and new price relatives among the various outputs in agriculture. With the program, the impacts of such changes allows a period of time to adjust across the affected sector. That is, the impacts of price or other variability can be absorbed more slowly, but they still have to be absorbed, allowing time to redesign how the farm operates. However, the program does not prevent a farm out of business going out of business with continued low prices, low efficiency or managerial errors. It simply slows the process. With price increases, the reverse happens. The Olympic average trails the impact of rising current prices, offering more limited support in a period of rising prices. The program also has a feature that allows adjustment of the Olympic average for substantial change in scale or size of the farm operation, both up and down. The average is recalculated based on the farm size in the program year. This offers full program protection for the farm 174 of 373

Douglas D. Hedley — Written Evidence that increases in size, and removes protection as farms decrease in size as retirement from farming approaches. My general view is that the program discourages high risk behaviour of individual operators, but encourages sound management over time reflecting market conditions. Let me comment briefly on AgriRecovery. In the paper I sent earlier, I noted the persistence and growth of ad hoc programming in the period from 1970 to the early 1990s in Canada. Once started, this approach gathers steam overtime and each program stimulates requests for other such programs on the basis of “fairness”. Certainly, the Canadian government currently has the legislation in place for such ad hoc programs in several Acts; it is not a matter of finding the basis in legislation for such programs. Federal-provincial Ministers have struggled over many years to set up a suite of business risk management programs that allowed them to deny ad hoc program (economically and politically) so long as the long term programs were available and used by the farm operators. Nonetheless, some events require special attention and support to prevent collapse of an industry, or severe stress on a part of agriculture. An example would be the BSE case in May 2003 in Alberta. Another case would be the ice storm in Ontario, Quebec and the Maritime provinces in 1997. The AgriRecovery program provides carefully designed rules for federalprovincial governments for the conditions under which such programs could operate. By jointly agreeing to the rules, it prevents one province from using its own programs to encourage production in its own province, potentially drawing such production away from a neighbouring province. Similarly, it allows Ministers the political rationale to collectively deny an ad hoc request for additional support. The only difficulty with such a program is that Ministers in the future, unconvinced of the need to adhere to the rules of the program, begin to enable/accept requests for additional support outside of the strict rules. Any movement toward such an outcome will quickly lead to additional requests and approvals, destroying the original intent of the program. Any ad hoc program can lead to repeated requests for additional assistance in the subsequent year or years. A current example is support payments for dairy in some countries of the EU. Once started for two or more years, it is no longer ad hoc, but an entitlement program, with all the associated difficulties in terminating such support. One other comment is needed. The federal and provincial governments have a general agreement on dealing with emergencies and disasters across the entire economy, not just agriculture. The arrangements essentially provide that provinces are expected to pay for damages and recovery up to some amount per capita, then the federal government and provincial government equally fund for emergencies and disasters at a higher level of cost per capita in the affected region, and ultimately, the federal government funds 90 percent at levels above the second tier. This approach is reasonably stable and reworked in negotiation from time to time. The common difficulty for agriculture is that calculation of the costs do not include either insured property loss or insurable property loss (whether or not insurance was taken by the affected party). Considerable debate takes place on estimating costs when crop damage occurs in a disaster relative to crop insurance, usually resulting in a negotiated settlement within governments. b) We have heard mixed opinions about the role that Direct Payments under the EU’s CAP play in bolstering agricultural resilience. Some argue that a guaranteed income protects 175 of 373

Douglas D. Hedley — Written Evidence farmers from market volatility, whilst other argue that it disincentives innovation and forward-thinking. What are your thoughts? Ans.: Many of my comments in (a) above apply. I cannot find any sound argument for a guaranteed income approach, with one exception. The exception is a guaranteed income for a fixed period of time on the condition that the farm operator voluntarily retires immediately, leaving the assets to be garnered by other farmers (or other enterprises outside farming) able to more profitably use these resources. It would encourage small, largely unprofitable or inefficient farms to go out of business more rapidly in the adjustment process. I recall internal debates in the Canadian government over several years on this idea, but to the best of my knowledge, no program was ever established exactly along such lines. The Small Farm Adjustment Program in the 1970s did not have this provision. 4. The Role of Insurance (there may be overlap with 2 above) a) What experience does Canada have with insurance programmes to manage the impacts of price volatility? Ans.: Canada does not have any insurance programs (premium based) specifically designed to manage price impacts. However, the AgriStability program could be converted to an insurance style program, although Ministers have rejected such a change in the past. Crop insurance in Canada does not provide price insurance, only compensation for yield loss, with the farmer choosing between harvest price or a forward price in the insurance product at the time of contract purchase. b) To what extent are these insurance programmes publically or privately funded and what do they cover? Ans.: In AgriStability, it is not an “insurance style” program. Calculation of the cost shares faced by governments and producers is complicated. Farmers must suffer a 30 percent loss in margin before any payment from governments is made. Thereafter, governments (federal 60 %, provinces 40 %) pay for 70 % of the loss of a positive margin, and 60 % of any loss on negative margin. This is consistent with the WTO requirement than governments cannot pay any part of the first 30 percent of a loss, and only 70 percent of any additional loss (WTO AoA). I hasten to point out that the rule in the WTO AoA specifies “income loss”. It does not define income as gross income, net income, or in Canada’s case, margin (which for program design and integrity reasons, is not the same as net income). There has been no WTO challenge to Canada’s use of margin. I will comment briefly on crop Insurance (AgriInsurance). The premium shares are: 36 % federal, 24 % provincial, and 40 % producer across the entire program. There is no magic formula for these shares. It was a negotiated arrangement over 15 years ago. The only unsubsidized program of insurance in crop production comes from a presentation I saw at the Canadian Agri-food Policy Conference in January 2016. The presentation was by Grant Kosior, available on the Canadian Agricultural Economics Society website (see the agenda for the conference; the video of the presentation (sales pitch, really) is available as uTube). He is offering a program in both Canada and the USA with considerable success, 176 of 373

Douglas D. Hedley — Written Evidence according to him, even in the face of subsidized crop insurance in both countries. While I talked with him briefly after the presentation, I have not followed up with him so far. c) What feedback do you get from farmers regarding the insurance options available to them? Are they sufficient to help manage risk? Ans.: I can only comment on Crop Insurance (AgriInsurance). The program is strongly supported by farmers and Ministers. Some agitation occurs in trying to bring additional small crops into the program, and pressure to increase levels of yield loss coverage. With the legislated requirement for actuarially sound premium rates, these pressure are easily managed. A nuance is that crop insurance is integrated with AgriStability, such that AgriStability payments are made after crop insurance indemnities are paid and included in the revenue of the producer for purposes of the AgriStability program, and it assumes that the producer has crop insurance whether or not the producer actually had crop insurance. d)

What are the pros and cons of publically-funded insurance schemes?

Ans.: the greatest “pro” is that governments can deny ad hoc program requests, when insurance and other program arrangements are in place. The greatest “con” is that there has been little exploration of the necessary premium cost share of governments to attract a significant majority of producers to use the program. See my comment above on the Grant Kosior program. 5. Recommendations to the EU The Committee received evidence from the European Commission’s Directorate-General for Agriculture (DG AGRI), suggesting that it is not appropriate to compare the EU and Canada or US agricultural models. a) Which types of risk management measures do you think the EU should be thinking about when revising the CAP for the period after 2020? b) In your view, what role should insurance play in the next round of CAP reform? c) In your opinion, which types of financial instruments deployed in your country would the EU and its Member States benefit from adopting? d) The Committee has received evidence suggesting that the Canadian agricultural model is not relevant for the EU due to different landscapes and institutional arrangements. Do you agree? Ans.: I really have no comment on items a, b, and c. For d, No. Canada has just as much or greater diversity in landscape than that found in the EU, yet Canada has found a relatively stable suite of programs that offer similar or identical coverage across a wide range of commodities. The argument based on diversity of institutions or landscape is really an argument that one region or commodity needs more “help” than another. Any sense of fairness is completely lost in such an approach. It took Canada over 30 years of trial and error to get to the current suite of risk management programs that met the 1995 WTO requirements, afforded the same treatment across all regions, etc., although Canada only had to deal with ten provinces and three territories, compared to the more numerous voices in the EU. Institutions by their nature are manmade; I cannot see how institutional arrangements cannot be found to accommodate 177 of 373

Douglas D. Hedley — Written Evidence common programs across countries of the EU, excluding of course the political difficulties in doing so. Other Comments Canada has used the Canada Revenue Agency (CRA) to collect information to operate the AgriStability and AgriInvest programs for many years. Farmers file their income tax returns to CRA with the additional forms required to process payments under the two programs. Failure to provide accurate information to the CRA is covered under the criminal code. (One can find all of the forms for collection of information on line.) CRA is only allowed to keep records required for income tax purposes. Once received from farmers, the tax information and any information required for program operation is separated and downloaded to Agriculture and Agri-food Canada (AAFC). CRA does not keep the additional program information, not required for taxation purposes. AAFC then distributes the required information to provinces, where provinces deliver the program as necessary. AAFC randomly audits a sample of farm records each year to maintain integrity of the programs. While CRA is invited to share in the audit, the CRA has essentially abandoned audits of farms, because of the AAFC audits. All information processing for program delivery is carried out in isolation of the internet and related links, e.g., blue tooth. This arrangement gets around the problem of direct farm sales to consumers in operating the programs. If farmers wish to not include some of the revenues from direct consumer sales, then program payments do not adjust for this leakage in revenue and Olympic average calculations. From time to time, ad hoc programs are required, and use the same methodology (tax return information) as the basis for calculating payments. In AgriInvest, all banks and credit unions holding AgriInvest accounts with farmers report monthly to the program delivery group in AAFC, with account balances, receipts, withdrawals, and interest paid. In talking with US farm groups, they find this use of the CRA as the information collection agency for farm programs a complete anathema. On crop insurance, the program is delivered by provincial agencies entirely. It are no private companies that deliver the program as in the USA. Costs of program delivery in Canada are substantially below the delivery costs in the USA. Again, there is no willingness to consider using a government agency in the US to deliver crop insurance. 9 March 2016

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Professor Ian Hodge — Written Evidence

Professor Ian Hodge — Written Evidence Implications of resilience Resilience has become a focus of attention as an objective across a broad range of disciplines and applications. Its significance has arisen in the context of the increasing appreciation of the significance of the complexity of systems being planned and managed in a variety of contexts and disciplines. Folke (2006, p. 259) defines it as “the capacity of a system to absorb disturbance and re-organize while undergoing change so as to still retain essentially the same function, structure, identity and feedbacks”. A goal of resilience implies a rather different approach from the efficiency usually advocated in economics. A conventional economics approach would tend to estimate likely future streams of costs and benefits and support decisions that maximise net present value, making efficient use of all available resources. A resilience approach emphasises that the future is unknowable anticipating unpredicted shocks and exigencies. It builds the capacity of the system to deal with uncharted conditions typically maintaining diversity and holding reserves seemingly underemployed that can be drawn upon to address future challenges. This emphasises not just a capacity to absorb change, but also the potential to re-organise and adapt. It is not simply about preventing change, disturbance opens up opportunities for renewal and new trajectories. Resilience thus includes ideas of adaptation, learning and selforganisation. Institutions are required that build knowledge of the systems and apply this knowledge to management practices. They need to be flexible, dealing with perturbations and surprise, and operate across multiple levels. A key approach is through adaptive management that recognises the high degree of uncertainty and ignorance and treats initiatives as experiments, learning and incorporating the results into future management strategies. Resilience at the farm level Darnhofer (2010, 2014) discusses farm level resilience. She considers the strategies of a sample of Austrian family farms that can be seen as building resilience: learning to live with change and uncertainty, nurturing diversity in its various forms, combining different types of knowledge and learning, and creating opportunity for self-organisation and cross-scale linkages. Farmers maintain flexibility and adaptability and build extensive networks to diversify information and income sources. They take a long term perspective and avoid excessive debt or dependence on factors outside of their own control. This does not mean that they are static. Rather they respond to opportunities both on and off the holding. They collaborate with other farmers and engage with local community institutions. This focus on resilience is distinct from the analytical assumptions of equilibrium thinking, centred on linearity, predictability, optimization, homogeneity and simplification as typically adopted in conventional farm management analysis. We may think of resilience as relying on a series of different types of capital: financial reserves that can be drawn on when incomes are low, levels of machinery and other assets that give capacity to cope with unfavourable production conditions, human capital that provides knowledge and skills to understand and address changing and unfamiliar circumstances, natural capital that provides ecosystems services in support of production,

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Professor Ian Hodge — Written Evidence and social capital that provides access to social networks and support for information and sharing resources. Capital endowments beyond the level required for expected production conditions give the system greater capacity to deal with unforeseen events. This might be in the form of diversification of enterprises against poor returns in a single enterprise, water storage (in reservoir or soil holding capacity) against droughts, cash available to tide things over in the face of a short term loss of income, storage capacity for crops to allow flexibility in terms of when they may be sold, access to external advice, voluntary labour or support in response to pest and disease outbreaks. This implies a degree of redundancy; under normal circumstances the levels of capital maintained might appear to be excessive or inefficient; beyond that required to deal with expected conditions. Standard management advice would tend to advocate squeezing these capitals in order to avoid ‘waste’. This suggests that building farm level resilience goes well beyond the usual financial considerations relating to insurance or price volatility. Resilience at the agricultural sector level But is resilience at a farm level necessarily desirable at an agricultural sector level? At some level, resilience of the agricultural sector, in parallel to the issues from the perspective of individual farms, implies the maintenance of certain sorts of capital. But the ‘core functions, structure, identity and feedbacks’ that are protected through resilience at the individual farm level may well be different from the ‘core functions, structure, identity and feedbacks’ that would be protected by the adoption of resilience at a larger sectoral scale. While the adoption of a resilience approach by individual farms may be in a farmer’s private interest, it is likely that the ‘best’ private and social approaches towards management for resilience may differ. For individual farmers the overall goal pursued is often to ensure farm continuity and inter-generational succession. Private resilience will tend to maintain a given set of businesses in place and hence the set of skills, abilities and objectives of the present population of farmers. Does this mean that as a result society might forego some options that could in the longer term potentially deliver a greater social value that might be achieved through more radical change? From a social perspective, an industry needs to adapt and develop over time. This will usually be accommodated by the adaptive capacity of the set of individual businesses that comprise the industry at any particular time and a natural turnover of businesses. They will adopt new techniques and activities in response to changing sets of opportunities and constraints. But some businesses may resist changes that could be beneficial at a more aggregate level. Farmers can be committed to a particular type of production or technology and may not be willing or able to adopt a new or different approach. In this context, the only way in which the industry can change more radically would be through a change in the population of businesses, some leaving the industry and new ones joining. When there are major shocks or stresses, as has occurred periodically in the past (Hodge, 2016), it may require more radical changes in agricultural systems and structures that the existing population of farmers or the current structure of farm businesses is unwilling or unable to deliver. The restriction on this more radical adjustment option might have a substantial opportunity cost to society in preventing a shift towards more socially valuable enterprises or techniques. This sort of more radical change may take place for example in 180 of 373

Professor Ian Hodge — Written Evidence response to a particular crisis, such as an agricultural depression, a substantial policy reform, such as occurred in New Zealand, or a major outbreak of disease. This may be seen in terms of ‘creative destruction’. The process is costly and painful for those whose livelihoods are damaged but potentially beneficial from a social perspective as it may serve to set the sector on a new development path. Social resilience is not simply the sum of privately resilient farms. It may of course be the case that radical change also depletes certain types of capital; perhaps the existing structure of businesses is necessary in order to protect levels of critical natural, human or social capital. For instance, rapid farm structural change might promote changes in land management that irreversibly damage habitats or cause an irreversible depletion of social or human capital (see e.g. Sinclair et al. 2014). It may lead to a loss of local or indigenous knowledge amongst a local farming community. The argument here is not that major structural change is necessarily socially beneficial but that it might offer some net benefits. Policy implications One issue that has not be widely discussed is ‘how much’ resilience should there be? A common answer would suggest that we should have ‘more’, especially as an argument for the conservation of important forms of natural, social and human capital. But discussion here also suggests that it may be possible in some respects to have ‘too much’. It is thus important to identify specific forms of capital where market failures or short time horizons threaten capital sustainabilities. Will the types of capital on which resilience is based and the services that they deliver be supplied by or protected from the market? Individual farmers will seek to build the resilience of their businesses and so will have an incentive to build the relevant capitals. However, several types have public good characteristics that imply that they may be insufficiently supplied through a market. This sort of argument applies to investment in education, training and advice or to the research, development and dissemination of techniques that can reduce farmers’ reliance on purchased inputs. A similar argument applies to investments on the development of social institutions that can promote coordination or collaboration amongst groups of farmers, sharing information or equipment, co-ordinating land management initiatives or simply maintaining a support network. It may also be suggested that government should aim to reduce the transactions costs of adjustment so that the agricultural sector can adjust more effectively without the need for more disruptive changes. Examples here include support for farmers to move out of the sector or for young farmers to move in, or for the development of skills and knowledge to improve decision making amongst farm decision-makers. In the past, land has represented a major impediment to agricultural adjustment. More flexible arrangements for the transfer of land between occupiers, such as through contract farming agreements, can allow businesses to grow or contract without more costly and inflexible transactions in the land market. Within this context though, it is important to ensure that long term responsibilities for the conservation of land resources does not become compromised with the growth of short term interests in agricultural operations.

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Professor Ian Hodge — Written Evidence Conclusions Resilience in the agricultural sector involves a broad range of issues including but not limited to prices and finance. Farms need to have the capacity to withstand relatively short term volatility in prices and costs, but also to be able to reorganise in response to changing circumstances while retaining their core functions and capabilities. There is a distinction to be drawn between resilience as perceived at the individual farm level and that at the level of the agricultural sector. While rapid and radical change can incur significant social losses, excessive resilience may prevent socially desirable adjustment that can improve the performance of the sector in the longer term. There is a need to identify and protect critical capitals, especially whose loss could be irreversible and that need to be provided on a collective basis. Many of the core capitals on which resilience relies have significant public good characteristics that will not be developed and maintained adequately through the market. There is a significant role for government in supporting the provision of these capitals and in reducing the transactions costs of agricultural adjustment. References Darnhofer, I. (2010) Strategies of family farms to strengthen their resilience. Environmental Policy and Governance 20, 212-222. Darnhofer, I. (2014) Resilience and why it matters for farm management. European Review of Agricultural Economics 41 (3) 461-484. Folke, C. (2006) Resilience: The emergence of a perspective for social-ecological systems analyses. Global Environmental Change 16, 253-267. Hodge, I. (2016) Delivering sustainability in agricultural systems: some implications for institutional analysis, Chapter 12 in S. Ramsden, S. Gardner and R. Hails (eds) Agricultural Resilience: perspectives from ecology and economics. Cambridge University Press (forthcoming). Sinclair, K., Curtis, A., Mendham, E. and Mitchell, M. (2014) Can resilience thinking provide useful insights for those examining efforts to transform contemporary agriculture? Agriculture and Human Values 31, 371-384. 29 December 2015

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HSBC Bank Plc — Written Evidence

HSBC Bank Plc — Written Evidence 1) INTRODUCTION HSBC Bank in its day to day contact with business customers across a wide number of sectors including Agriculture, has to deal with volatility in various commodity cycles, as part of the economic cycle as a whole. This short paper summarises how we assist our farming customers at present, and how both our customers and ourselves cope with and adjust to price volatility. 2) CURRENT HSBC POLICY FOR UK AGRICULTURE HSBC Bank has had a dedicated Agriculture team for over 5 decades, as part of our long term strategy to support our farming customers in the UK, and to consider, assess and support individual lending requests for those businesses on a new and ongoing basis. For a number of years, our credit policy for the sector has been focussed upon the economic viability of an individual business, irrespective of its enterprise, and its scale. 3) FORWARD PLANNING 2016 PUBLICATION a) To assist farmers undertake their own financial planning, we have published the following booklet which covers the methodology by which we consider individual farm viability on a cashflow basis, and some of the main enterprises which are deployed in UK Agriculture. The booklet also contains background detail on some of the wider influences on the sector as an industry, and it’s prospects within the wider economy. A full copy of the 43rd edition is enclosed.18 3b) We do support a greater range of farm enterprises than those shown within the booklet. Many of those not covered have quite bespoke supply chains, linking to the producers’ immediate customers who process the commodity, with distinct production and pricing criteria. Such examples would include the pig, poultry (egg as well as meat production) and intensive vegetable and horticultural sectors. As such, the principles of understanding enterprise output, direct costs associated with production, and business overheads incurred to operate in order to assess overall cash margin generated can be applied to many circumstances. This can include the impact on an individual business of price movements in terms of either output prices or key inputs, to assess sensitivity and the impact of volatility on that business. 4) OBSERVATIONS ABOUT COMMODITY PRICE VOLATILITY ON FARMS IN UK AGRICULTURE: The graph below shows a hypothetical commodity cycle over a 5 year period, and its impact on businesses with varying cost bases that may operate across the same sector.

18

http://www.business.hsbc.uk/en-gb/agriculture/forward-planning

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HSBC Bank Plc — Written Evidence

1. Variation between farms that otherwise often appear very similar structurally in terms of physical output, and supplying identical markets, can be quite significant in terms of economic viability. 2. The biggest variation on farm is often shown in unit costs of production and total output achieved. 3. The highest cost operators do deliver positive margins at times of high prices in the above cycle, though they make the least in the so called ‘good times’, and lose most by comparison in the down turn. 4. By comparison, those with the comparatively lower costs of operation make the most cash in the ‘good times’ and are last to potentially lose money in the downturn. Most noticeably, they are the quickest back into profit on the upturn, and usually their longer term plans and business confidence are damaged least by the uncertainty of volatility. 5. Costs of operation can vary year by year within a business merely by the function of yield, and the impact of weather and individual seasons on a locality, and on individual farms. 6. Even the very best by this analogy, is not protected from losing money, and no one knows when the cycle will specifically return to a more positive outcome. 7. Commodity prices are often out of the control of the individual operator, whereas an enterprise’s cost base is far more under the control of its owner/ operator. 8. Size of operation is no guarantee to success, though scale can be advantageous with the correct management.

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HSBC Bank Plc — Written Evidence 9. As we are seeing in milk production globally at present, the price highs and lows vary between cycles, and demonstrate a complete disregard for what could be described as ‘normality’ hitherto. 10. An increasing number of farm businesses undertake management costings and accounting. 5) OTHER OBSERVATIONS The UK Agriculture industry has a considerable amount of information available to it to identify and quantify past market trends, and to a lesser extent enterprise margins. Barring the cereals and oilseeds sector, Futures Markets pricing mechanisms are not available, though in some other sectors an element of ‘contract’ forward pricing is available in certain circumstances. In recent experience, individual farm businesses do not always take up these opportunities, for a host of reasons, presumably and including the limitation that such would bring regarding potential upside in prices in due course. Certain sectors, particularly those that have had little or no CAP support for a number of years, operate a ‘cost of production plus’ model, such that the farm business operates successfully in what could be a quite price volatile environment, while the buyer secures known volumes of a product, at a known quality. Both parties are more dependent upon each other than that implied in a pure open market transaction. At present, under existing EU CAP arrangements no insurance based forward pricing mechanisms are offered to UK Agriculture as a whole or as individual farm businesses, as now seen in the USDA’s Price loss Coverage and Agriculture Risk Coverage models as part of their 2014 Agriculture Act. Assessing how this enhanced policy operates will provide excellent guidance to any future EU policy amendments and inclusions insurance based price support mechanisms.

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HSBC, Barclays Agriculture, European Investment Bank, and NFU Mutual — Oral Evidence (QQ 64–73)

HSBC, Barclays Agriculture, European Investment Bank, and NFU Mutual — Oral Evidence (QQ 64–73) Transcript can be found under Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73)

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence

Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence Has Price Volatility Increased and Does it Vary across Commodities? As noted in our oral evidence, price volatility relates to the variation of prices around a trend. There are two dimensions to volatility: amplitude and frequency. While all markets are characterised by some degree of variability (changing prices being the key mechanism via which demand and/or supply can adjust), volatility can cause problems to the extent that the either the amplitude or frequency is ‘excessive’ or imposes costs on producers and/or consumers to adjust to these price signals. While all markets are characterised by volatility to some degree, agricultural markets tend to exhibit higher levels of volatility largely reflecting the underlying ‘inelasticity’ on the demand and supply sides of the market, particularly in the short-run. The implication of these underlying characteristics of agricultural markets is that for any given change in supply or demand, most of the adjustment in these markets occurs with respect to price changes. While we can measure this volatility over different time periods (and where the frequency of the data can impact on the measurement of this volatility), agricultural markets are also prone to ‘asymmetric volatility’ or occasional spikes. This was evident in the late 2000s when the world economy experienced the price spikes in food markets and again in 2011. The underlying cause of asymmetric volatility is the role of storage: when stocks of commodities are high, any change in supply or demand in agricultural markets can be smoothed out by the release or accumulation of stocks and which therefore serves to ameliorate the extent of the price changes. But when stocks are low, price changes are exacerbated or, in more technical terms, are ‘non-linear’ which means that price variability become much more substantive. Deaton and Laroque (1992) and Wright (2011) highlight these issues. With the experience of the price spikes in 2007-2008 and 2011, this has given rise to concerns that price volatility in agricultural markets has increased. While it is certainly true that the variance of agricultural prices would have increased over this period (given the rise and subsequent falls in prices), the core question is whether-taken over the longer run, price volatility has now higher compared with historical experience. The evidence suggests that this is not the case with recent research (Balcombe (2009), Gilbert and Morgan (2010) and Huchet-Bourdon (2011) among others) being consistent in this appraisal. Of course, price volatility can vary across different commodity markets and the experience over different time periods may also vary by commodity sector, but the evidence points to no general increase in the underlying volatility of prices on world agricultural markets. Figure 1 below gives some indication of price volatility across different commodity sectors and over different periods covering the 1960s through to 2014. Although there was evidence that commodity price volatility increased in the 1997-2009 period (this period being inclusive of the price spikes of 2007-2008), there was no evidence that this was substantially higher than other periods, most obviously the 1960s through to the early 1970s which covered the commodity crisis of 1972-1973. Huchet-Bourdon (2011) confirms these insights. Using monthly data and employing the coefficient of variation (the ratio of standard deviation to average levels) as the measure of volatility and covering sub-periods since the 1970s, the results confirm that the 2006-2010 period did exhibit higher levels of volatility compared to the 1990-2000 period (and 2001-2010) but not necessarily with respect to the 1970-1980 period (which covered the commodity crisis of 1972-74). Indeed, in the 2006-2010 period, 187 of 373

Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence some commodity markets even exhibited lower levels of volatility compared to this earlier period. Figure 1: Coefficient of Variation of Nominal Agricultural Prices, 1960-2014

Source: European Commission The farm sector is also exposed to price volatility in input markets, notably oil and fertilisers. Of course, the drivers of prices in these markets are different from agricultural markets (notably developments in the oil market have been tied with OPEC and other political and economic issues). However, these markets also spiked in the late 2000s lending evidence to the view that agricultural and energy markets have become increasingly interwoven in recent years (von Braun and Tadesse, 2012). Taken over the (1961-2014) period as a whole, there is no obvious indication of an upward trend in price volatility in these markets. As is evident from Figure 2 presented below though, volatility in agricultural input prices has generally been higher than price volatility in agricultural output markets in all periods since the 1960s. Huchet-Bourdon (2011) also confirms these observations using alternative measures of volatility and data of differing frequencies.

Figure 2: Coefficient of Variation of Nominal Prices across Commodity Sectors, 1960-2014

Source: European Commission

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence Globalisation and Drivers of Price Volatility The price spikes of 2007-2008 and 2011 has obviously raised concerns about the impact of price volatility on consumers and producers, not only in the UK but across developed and developing countries in general. There has also been considerable debate among economists on the causes of these price spikes. There was certainly a combination of factors that contributed to these price spikes which-against the background of weather shocks to agricultural production in certain key supplying countries- include the rundown and hence low availability of stocks, the trade policy responses of exporting and importing countries, biofuel policies in the US and the financialisation of commodity markets among others (See von Braun and Tadesse, 2012). While researchers often disagree on the primary cause much attention has focussed on the financialisation of commodity markets. While there was certainly evidence on the entry of index funds into commodity markets and which coincided with the commodity price spikes, there is no conclusive evidence that the financialisation of commodity markets was a primary driver of the price spikes. Irwin and Sanders (2010) discuss this issue. Despite the evidence not pointing to an increase in price volatility, the changing nature of the EU’s Common Agricultural Policy (away from commodity price support to direct payments) has likely increased the exposure to price volatility that arises from world markets. In recent years, to accommodate integration of the EU into the GATT and WTO framework, the policy has shifted away from such market intervention and towards support for farm income that had no relation to production. Figure 3 presents evidence on the way in which the expenditure on the CAP has changed from market intervention and price support in recent years. Figure 3: CAP_ Expenditure by Instruments Used

Source: European Commission The rising openness of the UK economy to food imports means that price developments on world agricultural markets are more pertinent to UK producers and consumers. Figure 4 189 of 373

Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence highlights change in the UK’s self-sufficiency; this has fallen 20 percentage points to around 60 per cent since the early 1980s. Figure 4: UK Self Sufficiency (1962-2014)

Source: Defra In that sense, the price spikes of 2007-2008 and 2011 would clearly have impacted on UK agricultural prices and retail food prices. Indeed, the evidence points to UK food inflation being generally higher than other EU Member States and UK agricultural prices being increasingly tied to world prices (see Lloyd et al. (2015) and Davidson et al., 2015). The UK experience on retail food price inflation compared with EU Member States is presented in Figure 5. With the exception of Estonia and Hungary, food inflation was higher in the UK compared with other EU Member States with UK food inflation over the period since 2000 being higher than the EU average for food inflation (3.25 per cent per annum compared with 2.78 per cent per annum). Figure 5: Retail Food Inflation across EU Member States 8 7 6 5 4 3 2 1 0

2000-2013

Austria Belgium Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom

2007-2011

Source: Lloyd et al. (2015)

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence However, an additional aspect of price volatility in the UK compared with world markets is the exchange rate. With most primary commodities being priced in US dollars, the £:$ exchange rate can be an important determinant of how prices evolve in the UK. This is corroborated by the evidence presented by Davidson et al. (2015). In research that aimed to decompose the factors that would have driven UK food inflation, the authors found that while prices on world markets were the most important driver of retail food inflation, the £:$ exchange rate accounts for a significant proportion of the food inflation in the UK. Specifically, they show that over the medium term (approximately two years), the UK exchange rate accounts for around one-fifth in the variation in retail food prices with world commodity prices accounting for around 36 per cent of the overall variation in food prices. In sum, price volatility in the UK is not solely driven by prices on world markets but can be influenced (sometimes ameliorating, sometimes exacerbating) by other factors, the most important of which was found to be the exchange rate. Food Scares A standard feature of agricultural markets is their susceptibility to supply shocks associated with weather and climate: depending on the geography and extent of the supply shocks, they can be an important determinant of price volatility in agricultural markets. Indeed, weather and climate factors in Australia, Asia and Russia were one of the main triggers of the recent price spikes. However, as raised in the oral evidence to the Committee, demand factors can also matter for price changes at the farm level where the short-run changes in demand (as distinct from underlying trends on the demand side) has often been associated with food scares. Research by Lloyd et al. (2006) highlight the importance of demand shocks for producers, focussing on the BSE crisis of the mid-1990s. In the context of a framework that allows them to separate different levels of the food chain, the price changes that occurred at the farm level were much greater than the changes for the identical product at the retail level. These concerns point to another factor which can have an important influence on price changes at the farm-gate: the extent of the pass-back from the consumer side through to the farm level in the face of demand shocks such as food scares can be influenced by the structure of the food sector. Specifically, while the effect of the food scare (BSE) reduced retail prices by around 10 per cent, farm-gate prices fell by 45 per cent. The main point to note that, and consistent with the theory relating to how food chains function, price volatility at the farm-gate is likely to be greater than the change in food prices at the retail level even for equivalent products. This observation holds for both supply and demand shocks affecting the food sector. Income Variability and Regional/EU Variation Price volatility is clearly an important concern for producers and consumers and is a key feature of agricultural markets but the extent to which it translates into income variability at the farm level will depend on a wide range of factors. These include the source of the cause of the price changes (e.g. whether this is global or more locally-based), the relative variation of prices across different commodity groups and countries (which will incorporate factors such as the exchange rate mentioned above), the composition of agricultural production in any specific region, the extent of diversification at the farm-level and the safeguards put in place at the individual/sector/country level to mitigate the impact of price changes. This relates to the question raised by the sub-committee about the comparative experience of income variability across regions and across the EU.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence A report by Vrolijk et al. (2009) produces some evidence on this issue. Though their data extends up to 2003 only, they nevertheless highlight the differences in experience in farm income volatility across EU Member States and by commodity group. Figure 6 presents their evidence on farm incomes, the most obvious insight from this figure being the considerable differences in the evolution of farm incomes across Member States. Figure 6: Fluctuations in Average Farm Income across EU Member States

Source: Vrolijk et al. 2009 Figure 7 highlights the variability in farm incomes by Member States and across commodity types, the evidence presented in the figure relating to cereal crops and horticulture. The most obvious observation relates to the differences across Member States, the length of the bar giving an indication of the range of the changes associated with farm incomes. While the differences can reflect a range of factors associated with agronomic conditions, farm structure and so on, it is evident from the table that the experience of income variability is varied across EU Member States and that UK farmers may experience higher fluctuations in income than other member States even for the same commodity. This experience also translates into regional differences within the UK: the report indicates that income variability is higher in Scotland than it is in other regions in the UK.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence Figure 7: Distribution of Family Farm Income across EU Member States for Selected Crops. 2002 (a)

Specialist Cereal Farms, 2002

(b)

Specialist horticulture farms, 2002

Source: Vrolijk et al. 2009 References Balcombe, K. (2009) “The Nature and Determinants of Volatility in Agricultural Prices: An Empirical Study from 1962-2008” Report to UN FAO Davidson, J., A. Halunga, T.A. Lloyd, S. McCorriston and C.W. Morgan (2015) “Commodity Price Shocks and Retail Food Price Inflation: Insights from the UK Experience” Deaton, A. and G. Laroque (1992) “On the Behaviour of Commodity Prices” Review of Economic Studies, 59: 1-23.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan — Written Evidence Gilbert, C.L. and C.W. Morgan (2010) “Food Price Volatility” Philosophical Transactions of the Royal Society B, 365: 3023-3034 Huchet-Bourdon, M. (2011) “Agricultural Commodity Price Volatility: An Overview” OECD Food, Agriculture and Fisheries Papers No. 52. OECD, Paris Irwin, S.H. and D.R. Sanders (2011) “Index Funds, Financialisation and Commodity Futures Markets” Applied Economics Perspectives and Policy, 32: 1-31 Lloyd, T. S. McCorriston, W. Morgan and A.J. Rayner (2006) ‘Food Scares, Market Power and Price Transmission: the UK BSE Case’ European Review of Agricultural Economics, 33: 119-147. Lloyd, T.A., S. McCorriston and C.W. Morgan (2015) “Food Inflation in the EU: Contrasting Experience and Recent Insights” in S. McCorriston (ed.) Food Price Dynamics and Price Adjustment in the EU, Oxford University Press, Oxford. Von Braun, J. and G, Tadesse (2012) “Global Food Price Volatility and Spikes: AN Overview of Causes, Costs and Solutions” ZEF Discussion Papers on Development Policy, No. 161. Bonn, Germany. Vrolijk, H.C.J., C.J.am de Bont, H.B. van der Veen, J.H. Wisman and K.J. Poppe (2009) Volatility of Farm incomes, Prices and Yields in the European Union. LEI Wageningen, The Hague Wright, B.D. (2011) “The Economics of Grain Price Volatility” Applied Economics Perspectives and Policy, 33: 32-58 2 February 2016

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11)

Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11)

WEDNESDAY 9 DECEMBER 2015 11 am Witnesses: Professor Wyn Morgan, Professor Tim Lloyd and Professor Steve McCorriston

Members present Lord Trees (Chairman) Lord Bowness Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Rooker Lord Selkirk of Douglas Viscount Ullswater Baroness Wilcox ________________ Examination of Witnesses Professor Wyn Morgan, Pro-Vice Chancellor for Learning and Teaching and Professor of Economics, University of Sheffield, Professor Tim Lloyd, Professor of Economics, Bournemouth University, and Professor Steve McCorriston, Professor of Agricultural Economics, University of Exeter

Q1 The Chairman: Thank you very much for coming and giving your time to this inquiry on price volatility and agricultural resilience. There are some formalities so that you are aware of what we are going to do. We have about an hour and will stick pretty well to that time. This is a formal evidence-taking session of our Committee. A full shorthand note will be taken, which will be put on the public record in printed form and on the parliamentary website. You will receive a transcript of the proceedings and are welcome to send us any revisions if you have any. The session is on the record. It is being webcast live and will be accessible via the parliamentary website in due course. I think you have been provided with Committee Members’ interests. Members will declare any relevant interests when they pose

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) their questions. Would you like to introduce yourselves and make a brief opening statement, and then we will move into questions? Professor McCorriston, would you like to start? Professor Steve McCorriston: I am Professor Steve McCorriston. I am professor of agricultural economics at the University of Exeter. My professional background is in agricultural economics, commodity markets and trade-related issues. I have published widely in some of the major journals. I am editor of the European Review of Agricultural Economics. The Chairman: Thank you very much. Professor Lloyd? Professor Tim Lloyd: Good morning. My name is Tim Lloyd. I am from the University of Bournemouth, where I am professor of economics. I was formerly at the University of Nottingham for about 25 years as agricultural and food economist. My interests are in the UK food sector, as well as agricultural price volatility and price behaviour in general. The Chairman: Thank you. Professor Morgan? Professor Wyn Morgan: Good morning. Ostensibly, my title is down as pro vice-chancellor for learning and teaching, which is not why I am here today. I am also a professor of economics at the University of Sheffield. My interests lie in food economics—that is where I have always done my research—in volatility over the years, including futures markets, and the use of those to try and deal with price instability, but also in competition along the food chain and how prices are received by consumers rather than necessarily at the farm gate. Q2 The Chairman: Your title is very appropriate; we are here to learn. Perhaps I should kick off with some definitions. It would be useful to hear from you all. Questions may be directed to one, but feel free to chip in. If we could start with some definitions and clarity about what we mean, could you define what we mean by price volatility as a concept? Is it equally applicable to prices of farm products as well as inputs? That is an issue that we need to consider carefully. What are the positive and negative aspects on agriculture? We may come back on one or two other sub-questions. We have got quite a lot of mini-questions. That is quite a lot to start with. Professor Tim Lloyd: I will start off, if I may. Price volatility refers to the variability of prices around their expected level over time. This working definition is most useful as it refers to variability of prices over time around their expected level. One thing to get straight from the start is that we need to make a distinction between the levels of prices at a point in time, whether they are high or low, and the volatility of prices at a point in time, and that is how they are fluctuating between high and low. Clearly, they are related concepts, because, almost by definition, volatility will include some high prices and some low prices, but it is

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) distinct from the state of high prices or low prices. It involve this fluctuation, and that is an important thing to bear in mind. There are a couple of other things about the definition we need to take into account. It is the variability of prices around the expected level. That is a neat working definition, but, of course, there are many different ways to measure variability and expected level. When we get into the detail, we can find that price volatility is fiendishly complicated, despite that seemingly straightforward definition. A couple of things complicating this idea of fluctuating prices is that the time frequency of your data can affect that fluctuation. Whether you are looking at fluctuations on a daily basis or a monthly or annual basis, or even longer, will affect the definition of your data. I ought to say that most agricultural and food economists, when they think of price volatility, will refer to something called “realised” price volatility—that is the historical variation that we have observed—rather than something called “implied” volatility, which relates to an output from options and futures prices. When we speak of volatility, we are talking about how variable prices have been around some expected level over a period of time. We are thinking about a specific commodity, perhaps wheat or cocoa, over a period of time, how those prices vary over time, rather than how different qualities of cocoa or wheat change their price over time. It is the price of a homogenous commodity over a period of time. In terms of the way we measure this, there are many different measures, as I have alluded to, but possibly the most common measure is what we call the coefficient of variation. This is the measure of a variation of price relative to its average value over some sample period. The measure of variation that we use is called the standard deviation. That is a very commonly used measure of variation, but it is not the only one. We could look at the range in prices over a period of time, the difference between the maximum and minimum price, which would give us an idea of variation. It is typical to use this concept called standard deviation, which we can think of as being the typical variation observed in that price series. We measure that relative to the average level over the same period of time. The coefficient of variation gives us an idea of how variable the price series is relative to its mean value. Agricultural prices could have a coefficient of variation of about 20%, or more, indicating that the typical variation is about 20% of the mean value. The Chairman: I should have warned you that we have a card-carrying statistician on our Committee. Professor Tim Lloyd: I do apologise.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) Viscount Hanworth: I would think of a frequency spectrum and, therefore, I would ask you to de-trend the price series, perhaps after taking logarithms, and so forth. Are we then talking preponderantly of an annual variation, something that is attuned to the harvest, as it would have been back in the 19th century, or is there volatility at other frequencies? Professor Tim Lloyd: It could be any of those things, but primarily it is the annual variation—possibly the annualised variation. Typically, we use monthly data, so we are looking at the variation between January one year and January in the previous year, and likewise for other months, averaged over a 12-month period. Viscount Hanworth: I have been asked to question you more about the root causes of this volatility. The Chairman: Before we move on to that, can we finish this question? Viscount Hanworth: Sorry, is there more to be said? The Chairman: I think Professor Morgan and Professor McCorriston wanted to add to this. Professor Wyn Morgan: The question is whether these are the same and whether you can apply volatility measures to different commodities and to input markets. Yes, you can; you can measure any time series and its volatility, no problem. It does not mean they are all the same, of course. One of the things we have seen is the commodity and food markets’ variability changes, so it is not saying all markets are the same. Indeed, input markets have varied differently from output markets. The Chairman: I might pick up on that. Professor McCorriston? Professor Steve McCorriston: Just to add to my colleague Tim Lloyd’s comments. I would also make reference to asymmetric volatility, which is a particular characteristic of commodity markets where you have the average level and then the variability around that level, which Professor Lloyd mentioned, but you also have these occasional spikes. One of the features of commodity markets is that you might have the variability over time and then you have the occasional spikes, which we have witnessed over the last few years. It is related to volatility, but a different dimension as part of the distribution of prices. When these prices spike, it is a particular characteristic of price movements in agricultural markets. You can separate that out because the responses might be very different from the annualised variability that was referred to, which might be very different from the expected mean price. It is a dimension of variability, but a specific feature of variability and commodity markets.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) The Chairman: Before we move on to Viscount Hanworth, this inquiry to some extent has been stimulated by a lot of the publicity around, for example, the dairy industry and we have tended to think about the volatility of the farm gate price to the farmer. Could you say a bit about the input volatility—you did mention it—because that is going on at the same time? Presumably the volatility is not in the same direction of inputs and outputs, and so on. How do they relate? Professor Wyn Morgan: Absolutely, there is variability in inputs and farmers have very little control over that—their inputs are fertiliser, seeds and so forth, often driven by oil prices. There is a correlation between oil prices and both output and input prices. There is some relation, but they are not necessarily the same. You could get movements in input prices that are not necessarily the same as the movements in output prices. You could get a squeeze at both ends or indeed a benefit at both ends. As Steve was saying, these things are both good and bad. Q3 Viscount Hanworth: Most of what I was going to ask has already been answered. I have a title “root causes”, and you have probably covered those. Am I right in thinking that the variability in the supply and demand nexus for the ultimate consumables is greater than that of the inputs? You also mentioned the correlation of the input and output variability, and that must be looked at in each and every case. I suppose if one was talking in generalities one might ask: have variabilities changed significantly over time and have futures markets affected the variability by diminishing it? What about the effects of output for storage? Has that changed over time? The real question is: how are things evolving? Professor Wyn Morgan: There are a number of things there. In relation to the volatility over time, there is no evidence that there is a trend over time that volatility is going up all the time. The evidence is that volatility moves over time. For example, the 1960s were more volatile than the late 1980s. The 1970s were highly volatile, especially in the mid-1970s when we had the oil crisis. Things move over time. There is no evidence to suggest that we are on an upward trend. Viscount Hanworth: In volatility? Professor Wyn Morgan: There is no evidence for that. That is the historic piece. Professor Tim Lloyd: What the evidence does point to is that we have just been through one of the irregular occurrences of a volatile period. Volatility tends to cluster in periods of time and in between each cluster of volatility there is relative stability. If we look at the recent burst of volatility compared to the previous 10 years, which was a relatively stable

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) period, volatility has increased. However, if we go further back and include the 1970s, which was a much more volatile period than we have just been through, we can see the positive trend that we might observe over a short period of time disappears. The consensus is generally that there has not been a trend increase in volatility; we have just been through one of those bursts of volatility that we often see in commodity markets. If I may come back to a previous point about volatility in commodity prices, that is agricultural output prices rather than agricultural input prices; volatility in input prices can be considerably higher than the volatility in agricultural output prices. If we compare the volatility of oil and fertiliser, for example, there is much higher volatility in all time periods compared to agricultural output prices. Viscount Hanworth: You said “can be”, but in fact you should have said “generally”. Professor Tim Lloyd: Generally, yes indeed. Viscount Hanworth: Which is exactly the opposite of what I was presuming. Would you fit a GARCH model or an ARCH model to the price series? Professor Tim Lloyd: Yes, that is a very standard approach in this literature. Professor Wyn Morgan: Can I deal with one point? You mentioned futures markets, as I did earlier. There has been a lot of noise around the role of futures markets in price volatility and, indeed, this whole financialisation of agricultural commodities. There has been a lot of work done to see if there is a link between what is going on in the futures markets and what has been happening in world markets in terms of price volatility. The evidence is mixed. There is no real consensus. There appears to be a bit of a chicken and egg, in that where there is volatility in markets people will move in, particularly in a world of low interest rates. If you are looking for a return, you can see how there might be a return in a more volatile market, so you will get a response to it. Part of the speculation in the futures market is a response to volatility, not necessarily the cause, although it could reinforce some of the volatility. The evidence seems to suggest that there is some impact, but it is not the cause. Viscount Hanworth: Am I right in presuming that the futures markets in the States are proportionately much bigger than the ones in Europe? Professor Wyn Morgan: Yes, they are. Viscount Hanworth: Is the volatility that they experience larger? Professor Wyn Morgan: I do not have direct evidence on that, but, generally speaking, the commodity markets are linked in the sense that there is a response, so you look at world futures markets as much as a specific one and there is generally a relationship. It is not

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) perfect. You would see London responding to some volatility as New York and Chicago would experience some volatility. There are relationships between those markets, but they are different in terms of magnitude. You are absolutely right that the American ones are much larger. Viscount Hanworth: I think someone is going to ask about globalisation, so I will desist at this point. The Chairman: Would you like to come in on that? Professor Steve McCorriston: Can I pick up on storage, which you mentioned, because it is a particular feature of the commodity markets as well that changes the way in which the dynamics of prices works? When stocks are high you have the ability to smooth the volatility over periods of time, but you get the asymmetric volatility and spikes appearing in markets when stocks are low. It is a specific feature of agricultural and commodity markets that you can have storage that covers different production periods, but when stocks are low you have these additional shocks when you get the potential for spikes appearing in markets. Viscount Hanworth: Statistically, can you see where there have been big stocks and volatility has been staunched? Professor Steve McCorriston: If you look over the 2000s, stocks were relatively high, prices were low and in world markets were relatively stable. Then there was a decrease in stocks and that was the background for the spikes that occurred, because there was no buffer to smooth out these price shocks that appeared from elsewhere. There is fairly wide debate on whether it was futures markets that contributed to these price spikes, as we have already discussed, whereas others would emphasise that the main background to the price spikes and the particular pattern of price movements was because we had low stocks, so when these events hit us there was no buffer to secure us against that. Viscount Hanworth: There is an intractable identification problem. Professor Steve McCorriston: Yes. The Chairman: Lord Selkirk, we are moving to trends. Q4 Lord Selkirk of Douglas: I have a general question about trends. You have answered this in part, because you have given evidence that there is not a trend in volatility. Looking at this subject, there may be more details when you look very closely at the commodities in particular. Are there significant differences between sectors or commodities? Which sectors, or commodities, are more exposed to volatility? If the answer is going to be so detailed that you cannot give it today, please feel free to send it in writing, because I think this is quite a

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) detailed issue. What is the likely projected trend, or trends, for the future? What is the evidence base behind these trends? Has work been done on this? As much information on this subject as possible. Professor Wyn Morgan: The first thing to say is we can certainly supply data. That is not a problem. In general terms, there are differences between the commodities, and these are the globally traded commodities. Indeed, even in the price spike we saw very different levels reached in the different commodities. In wheat, rice, soya, we saw different levels of volatility; they were not the same. Whenever you are looking at a commodity you must look at the specifics of that commodity and the markets in which you are operating. For example, rice was the one where we saw the most volatility, but that was entirely down to policy intervention and panic. There are differences between commodities. We can give you some evidence on that separately. That is not a problem. Professor Tim Lloyd: One very straightforward reason why there are different volatilities in different commodities is the storability of the product. We tend to observe, other things remaining equal, very high volatility in fruits, simply because they are perishable products that we cannot store. Wheat, on the other hand, is storable and its volatility tends to be less than others. Lord Selkirk of Douglas: The background to this question is what plans farmers can put in place to minimise any disruption to their future farming proposals. How much can trends help us with that? Is it a little or a lot? Does it depend on what the commodity is? Professor Steve McCorriston: Agricultural markets always have this characteristic of variability. It is one of the main characteristics of these markets due to the demand and supply not being very responsive, which means that when any shocks hit, the prices are always going to move much more up and down relative to other types of markets— manufacturing or whatever. It is a particular and well-known feature of agricultural markets. In relation to future trends, it is difficult in the evidence because the types of bodies or experts who do these forecasts tend to focus on the trends. It goes back to the issue about discriminating between which aspect of price you are focusing on. It is quite difficult to forecast the volatility. Work that is done by the OECD and FAO will tell you projections of price levels in the future, but not necessarily the variability around those trends in the future. You can identify what big trends might happen and what the drivers are, and you might say there are various issues that might affect variability in the future, but it is difficult to forecast what the variability is as distinct from what the future trend is going to be.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) Lord Selkirk of Douglas: Thank you very much. The Chairman: Could I just come in on that? I was very interested in what you said about other industries. I realise you are agricultural economists and we are focusing on agriculture, but I suspect we might want to give some contextual introduction. To what extent is this a particular problem of the agricultural industry and to what extent is volatility inherent in almost all other industries? Can we plead a special case for agriculture? The travel business is probably pretty volatile. Do you have any general comments about that? Professor Steve McCorriston: Volatility is a characteristic of all markets and that is the way markets function. Prices change in all markets, because that is the point of markets, and if you try to intervene in the market mechanism and stabilise prices then the market does not function. You tend to get variability in all industries. The issues about agriculture are distinct because the supply and demand functions, the slopes in the way in which consumers and producers respond to this, tend to be relatively steep, if that is not too technical a term, which means that most of the responsiveness in these markets when there is a quantity change happens in prices. One of the main distinctions between agricultural markets and manufacturing goods markets is that prices tend to be more volatile in agricultural markets, subject to commodities that can also differ. One of the things about agricultural markets is that prices tend to vary more than in other markets due to the nature of demand and supply. You have these other exogenous events that typically affect agriculture, such as weather, climate, et cetera, which add to that variability. The underlying premise is that agricultural markets would be more volatile in relation to price than other types of markets. The Chairman: I think it is important we understand that. Lord Rooker: You mentioned weather and climate as factors, which to me seems selfevident as a layperson. You were talking about storage of products, fruit or wheat. I can remember that in 2006 or 2007, when I was at Defra, an issue came up because of the winters and the summers and I asked the question, “Where are the wheat stocks?” and the answer was, “At sea”. That literally was the answer; they were at sea. There was no world grain storage unit. I do not know whether that helps smoothing out, because there is a transport issue. I do not know whether that is a factor. That was peculiar because there was a potential big shortage at that time due to the weather. Baroness Wilcox: Can I just come in on what has been said, if you do not mind? The truth of the matter is that exactly. So much of the stuff that comes in and out of this country

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) comes by sea and, therefore, very often they are selling and buying at sea and turning around suddenly in the middle of nowhere because they have got a better price. It is very, very volatile. When things are being transported they are really on the move, are they not? Professor Wyn Morgan: That is right. There are a couple of responses to that. You are absolutely right: the mid-2000s were very particular in that in the grain markets we had a real problem because Australia had three years of drought, and that is the point you were making. Australia, as one of the world’s major exporters, was not exporting, so the stocks were at sea. Because they were so tight, they were being bid for in a way that ordinarily would not have happened, because you would have had enough grain on the sea to meet demand. That was one of the very specific problems that we had in that period. Baroness Wilcox: Fascinating. Professor Steve McCorriston: The issue about storage and supply shocks is you can have supply shocks, but if you have sufficient storage that can smooth it out, in principle. There were fairly large production shocks in the early 2000s that were not reflected in substantial price changes. The issue about stocks is really important. In principle, even though we understand the issue about storage being able to smooth out price changes, one of the outcomes of the commodity crisis over the last few years is the transparency about stocks. One of the things that the FAO and World Food Programme did was set up AMIS, which was to provide transparency, so we would know where the stocks were, who they were being held with, how much was available, et cetera. The issue about stocks is important and the issue about transparency of stocks is also very important. The Chairman: We have introduced the globalisation aspect, which brings us nicely to Lord Cunningham. Q5 Lord Cunningham of Felling: What has been the effect of commoditisation of global agricultural markets on volatility, if any? Professor Wyn Morgan: In some ways that is the key question in many people’s eyes. In response to an earlier question, I mentioned the move into agricultural commodities from financial areas, hedge funds in particular. In seeking a return that they were not getting elsewhere in a world of low inflation and low interest rates, with big amounts of money, where do you put that? At that time commodity markets were starting to rise. There was a sense in which this was a long game; you could play at long hedging and get a return. The evidence suggests that there was a move of money into agricultural markets. The difficulty comes in unpicking whether that drove volatility or was a response to volatility. It was

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) certainly an initial response and, because there was fluctuation there, there was a potential for return, so money was drawn in. Whether it then drove much high volatility is unclear. Most of the evidence suggests it did not, but there was a small impact on volatility. You could argue that, yes, there was an impact on volatility, but that is not the whole story. There was volatility because of the factors we have already talked about—the shortage of stocks, et cetera. Financialisation probably exacerbated at the margin rather than necessarily being the cause. Lord Cunningham of Felling: So all these huge shedloads of money newly appeared in agricultural global markets and only had minimal impact. Professor Wyn Morgan: Minimal in relation to the other factors, yes, that is what the evidence tends to suggest. Lord Cunningham of Felling: What would the other factors be? Professor Wyn Morgan: The other factors would be things like exchange rates, the rising price of oil, a whole series of external factors, and the supply and demand shocks that Steve was talking about earlier. Lord Cunningham of Felling: Has this globalisation had any impact on production patterns? Professor Wyn Morgan: I have looked at the EU and there does not appear to be a huge response in the sense of a huge increase or huge decrease. Output varies over time, as we already know, and that seems to have continued. I suspect the one area where you could say there has been some evidence of this is in the US, where you had a very specific policy around biofuels. That increased the incentive to produce corn/maize, because from that you could produce biofuels. That had an impact on soya production. Farmers switched from one to the other in response. That was one of the drivers for the volatility that we talked about, because you had this sudden imbalance. Lord Cunningham of Felling: Did that policy decision, which it was, in the United States of America impact on price volatility in the European Union? Professor Wyn Morgan: Yes, it did. Lord Cunningham of Felling: I think you are saying that exposure to global agricultural markets does affect price volatility for us and our European partners. Professor Wyn Morgan: Yes. Q6 Lord Rooker: We are charged with looking at the EU, but things are commoditised and therefore are traded across the world. Is there any evidence within the EU that volatility

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) is different in different nation states, irrespective of farming methods? For example, are there areas where the producers have more control over the supply chain? Are there variations within the EU? Is the EU completely different from the rest of the world as a whole, or is it just absorbed into the fact that it is world supply? Professor Steve McCorriston: An important issue when you think about volatility and price changes is defining what the market is. The events that arise in world markets can be very different from events on domestic markets, which relate to the issue of globalisation. If you look at any country throughout the world, the patterns of price volatility domestically can be very different from the patterns of price volatility in world markets, due to factors such as trade policy, exchange rates, et cetera, and the openness of the economy to world markets. There are very big differences between countries. Even in developing countries they had a very different experience of price variability in the context of the price spikes. In relation to regional differences, I do not have any particular evidence. What we do know from an EU project that we were working in is that if you look at the patterns of food price inflation, which is different from what you are interested in per se, they were different throughout almost all EU countries. Some countries, such as the UK, had relatively high food inflation over the period of the commodity price spikes, whereas in other countries food inflation was relatively low. That would reflect partly what was happening in the supply chain and the way in which the food industry interacts with the agricultural sector. Also, differences in exchange rates can matter across different European countries. We do not have any evidence in front of us and we can try to supply evidence about agricultural price variability across the EU, but, in principle, across markets you would still expect differences. Professor Wyn Morgan: I think there has also been a difference in the impact of climate that we mentioned earlier in different parts of Europe. Its impact in south-eastern Europe is different from in northern Europe. There is evidence to suggest there are differences that are local supply conditions as much as these other macro factors that Steve has just mentioned. Lord Rooker: I saw some slides recently that the Department of Health produced. It was a nutritional exercise related to sugar. One of the factors—I should have checked this—was that the UK, within Europe, is unique in terms of foods sold on promotion, quite distinct from the rest of Europe. It was 40%, the next one was about 12%. There was a massive difference in the UK. Would that impact at all back on the producer in terms of volatility, the fact we have promotion for food that is different from all the others?

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) Professor Tim Lloyd: That is a very good point. We tend to think of prices being transmitted through the chain from the producer to the consumer, when in reality the causation is probably the other way around; farmers face prices that are determined downstream in the consumer market. You are right to point out that the UK is unusual in the world, let alone in Europe, in that 40% of the food that we purchase is purchased on promotion. As a result, the marketing strategies of the major retailers have a large role to play in the prices faced by farmers. Farmers are not just passing on prices through the chain; price pressures are coming the other way and maybe dominate the price pressures moving through the chain from farmer to consumer. Lord Rooker: It is even worse than I thought then. I had not appreciated that. Professor Steve McCorriston: It is important that we do not see agricultural markets in isolation. In undergraduate classes, we like to teach, “Here’s an agricultural market”, assuming that it is consumers who are consuming the agricultural goods, and that is not the case. Agricultural inputs into the food supply chain might be only 20% or 30% of their overall costs. What is important is the impact, structure and competition in the food chain and how that also impacts on agricultural prices and price variability. One of the reasons why that can vary across Europe is because the food chain across Europe also differs across countries. One of the responses by the European Commission to the food price spike was that DG Competition undertook an audit of competition policies that applied across the food sector in the EU, because they were concerned that what was happening in the food sector and agricultural markets was in large part driven by what was happening in the downstream markets, as Professor Lloyd mentioned. Those differences, whether price promotions, competition among retailers or the role of discounters, can have an important impact on how prices behave in the upstream agricultural markets. Lord Rooker: I have one final point. Notwithstanding the different types of farming within the EU, as I understand it a lot of EU countries have far more co-operation among farmers as co-operatives to control the produce they make further up the food chain. Does that smooth out volatility or, because they have a bigger grip on it, affect competition? It is unique to the rest of Europe; we do not do it in this country. Is that right? Professor Wyn Morgan: You have characterised it correctly. It is a response to the market position that farmers find themselves in. There are many farmers and far fewer buyers, so they have to think about how they respond to that particular structure. It is also a means of protecting their own interests in protecting the price of their output, because they can

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) negotiate from a stronger position, so it will help to smooth. I know we are going to talk later about how you respond to a world of price volatility. One of the ways is trying to get your price set. One of the ways you can do that is by negotiation, and your position in negotiation is generally stronger if you work co-operatively, that is very true. The Chairman: I think we had better move on. We can come back if we have time. Viscount Hanworth: Is it true that in fact there has been a huge consolidation of British farms into agribusinesses, or is this just a myth? Professor Wyn Morgan: There can be a lot of mythology around this. There is some element of shake-out in farming, and some of the smaller farms have gone, but not to the extent that we are led to believe that everything is industrial. Viscount Hanworth: That tied in with what had just been said. The Chairman: That brings us nicely to public policy. Q7 Lord Cunningham of Felling: In the European Union we have a heavily regulated agricultural set of policies. The CAP still commands 50%—round numbers—of the total EU annual budget. How does this impact on price volatility? Professor Steve McCorriston: If I can continue from a previous point, the difference between global markets and EU markets is important. One of the important features of the CAP over recent years has been to move away from market intervention. The more you move away from market intervention, the more exposed you become to price variability. That move to, perhaps in some cases, the more liberal trade regimes of the EU has undoubtedly created a stronger link between what happens domestically in the EU and what happens in global markets. Some of the changes that have been occurring in the EU potentially expose us to more price variability, but that is partly a reflection of the way in which the CAP was formed in the past. Lord Cunningham of Felling: Should public policy try to control price variability? Professor Steve McCorriston: I would say no. Professor Wyn Morgan: No. Lord Cunningham of Felling: Should we try to intervene on price volatility with public policy? Professor Wyn Morgan: My response would be to say no. You provide the mechanisms to deal with the outcomes of volatility rather than trying to control volatility directly. We have seen those attempts in world markets, and indeed in the EU, if we think about commodity agreements, which were designed to try to maintain a price and to stop volatility. Those

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) were extremely difficult to run and all collapsed because they could not hold together. It is extremely difficult to do. They are expensive to do as well. Even in the EU, we have seen that the impact of trying to intervene on the price is very expensive. As you rightly said, the EU budget in the past has had more than 50% go into agriculture. It is very expensive, has all sorts of distortions, and introduces incentives that are not helpful to agriculture in the round. My suggestion would be that you deal with the outcome of volatility, not try to control it. Lord Cunningham of Felling: I think you are saying that effects to mitigate price volatility would be more sensible than to tackle volatility itself. Professor Wyn Morgan: Yes. Viscount Hanworth: Would you discourage Government-inspired attempts to improve storage? Does that fall within the category of things that the Government should not do? Professor Wyn Morgan: Should or should not? Viscount Hanworth: Should or should not. What is your reaction to a marketing board that also encourages storage? Professor Wyn Morgan: My general response would be that the market will determine how much to store, and there will be a return to storage. The market should come forth with the storage levels that we need. That is generally what you would expect. Once you start to get Government trying to control the amount of food, let us say, then you start to get distortions in markets. If you start storing for one commodity, why are you not doing it for the others? You get skews, because you know there is a storage process there. It is a very slippery slope once you start doing that. Viscount Hanworth: You said that the market should come forward with the means of storage. Has it come forward adequately with the storage facilities? Professor Wyn Morgan: Generally, yes. We talked earlier about being on the seas and so forth. That is a very modern way of doing it and that has not been Government inspired; it has been the market responding to where are the demands for these commodities, how we get that commodity to that place, but in a way that is acting as a store, as we said earlier. Yes, it is doing it. We had particular problems, as Lord Rooker mentioned earlier, around periods when we had not enough supply because we had not grown enough because of droughts, et cetera. Generally speaking, stockholding comes from the market. Q8 Baroness Wilcox: I am not from things that grow in the ground; I am from fish that swim in the sea, so I am not in on this really. What I am in on is the fact that we are going to

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) have a vote soon as to whether we stay in the European Community or come out. One of the things which over time I have believed, and I am not sure how right it is, is that the common agricultural policy is still letting people grow things that we do not need, storing them and dumping them on the fragile economies of the third world. I hear that a lot. It will affect the way people vote. I wondered if you could be clear for me that you approve of the common agricultural policy as it is being run now. Are they are no longer letting people grow raisins that you do not want and storing them in great mountains? Is that all over? Professor Wyn Morgan: The common agricultural policy, as it is now, is a very different animal from the one that I grew up with in the 1970s and 1980s, when we did have butter mountains and wine lakes, and 84% of the budget went to agriculture and 50% of that went to milk, because of the way that the market was operated. That was about price intervention; that was about subsidies for prices; that was all about market intervention. The current CAP is very different. It is not about market intervention; it is about support for income. It is not about support for a product; it is support for income. It is a very different thing. It is designed to maintain the wider aspects of agriculture, the stewardship of the countryside, et cetera. It is targeting something quite different from the original ideal of the CAP, which was about supporting price. It is a different common agricultural policy, even though its name has never changed. It has evolved. Baroness Wilcox: Is it working? I am very interested. If so, if the Chairman allowed, could I ask you to write to me or guide me to where I can see this, because there is a feeling that it is still happening? In some countries in particular they are doing it. I know a wonderful story about friends of mine, who are farmers, and they said they are pulling up their apple trees from one place and growing apple trees in another place, because that was the way it was now working. If you interfere with the market like that, no one is going to love it very much. I wonder if it is possible for me to get some information on that. I would be very grateful. Professor Wyn Morgan: Absolutely. The Chairman: I want to ensure we keep our focus, because we could spend days talking about the CAP. In a word, has the revision of the CAP had a positive influence on the subject we are talking about, or a neutral or a negative influence? Professor Tim Lloyd: I would say a very positive influence, because it has shifted support to what we call decoupled payments. These are payments unrelated to production, so it does

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) not matter what prices are doing in the international market—as a farmer you will be getting part of your income from a payment that remains constant irrespective of prices. The Chairman: I am anxious that we cover impacts and responses, because they are important. We have about 10 minutes. Professor Steve McCorriston: I was just going to elaborate on the answer Professor Morgan gave to the role of the private sector. One of the important issues about whether it is the private or public sector, which is a general principle of policy, is whether there is a market failure. Can the private sector provide enough on its own to resolve the issues of variability? If the answer is no, then there is a potential role for an agricultural policy or CAP in some form to deal with that. If it is specifically on the issue of price variability but you are providing income support, I think that becomes a different issue. On the issue about stocks, for example, can the private sector provide that on its own? Can it provide other means of ameliorating the risks that producers face? If that answer is no, then there is a potential for the public sector to fulfil that role. Q9 The Chairman: We move to impact now, which is important. There are a number of sub-questions. You have the questions. If we cannot cover them all, maybe you could submit some written answers. The initial part of the question is, “To what extent has price volatility had an impact on” and then we have farm income, which leads to viability of farmers and structural change, presumably people going out of business; then impact on production productivity, which is in a national context, and food security and so on. Has it diminished our ability or not in that context? Then we have impact on land use and the environment and, finally, animal welfare. There is a lot there, but could you please try to tackle those? Professor Wyn Morgan: The question about income is an interesting one. Lord Cunningham asked earlier, “If we control price, is that a good thing?” Potentially, you could control price, but you might cause income to be much more volatile as a consequence. There is an unintended consequence. In relation to incomes, the evidence suggests that incomes have always been variable in farms because prices are variable: price times quantity gives you your income. If prices are variable, then your income will be. There is no evidence from European data to suggest that incomes have plummeted during a period of volatility because, as we said, volatility has ups as well as downs. There were periods in 2008, for example, when farm incomes rose rapidly, because prices were very high. They fell again in 2009, because they dropped again. Yes, there is a variability in income, and maybe the differences between the peaks and troughs were bigger in those years for the reasons we

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) talked about compared to the early 2000s. There is no evidence to suggest that when we are in a more volatile period incomes are worse in any way. In fact, in many cases they were better. The Chairman: Are you saying that, provided that farmers are resilient in being able to smooth out year to year, there should not be a huge impact on viability and structural change? That is not what we are seeing happen in dairy farmers going out of business, is it? Professor Wyn Morgan: There are two responses. When you have a volatile world, it is very difficult for farmers to plan and very difficult to think about investment with any certainty, because you do not know where the prices are going to be necessarily a year or two years down the line. You can get a sense of stasis and that can be problematic. If you are not investing in improving your productivity and price levels drop, then you are not able to meet the new market conditions, which can be a problem. That is some of what we have seen. Professor Tim Lloyd: One negative consequence of volatility is that it tends to lead to underinvestment. One of the longer-term effects of that is that you are less able to cope with future increases in demand. There is a vicious circle: volatility leads to underinvestment and underinvestment leads to less supply and, as a result, you are more prone to volatility in the future if as demand then rises. This is the longer-term dimension to the investment issue which is very real. It is something that is probably the worst consequence of price volatility, which in itself is not a bad thing. We almost come to the table thinking that volatility is bad and it is not necessarily so, as it can send signals to agents within the market to do different things. Excessive volatility that leads to catastrophic losses is clearly something to be avoided, but volatility in itself may not be such a bad thing. The Chairman: That is interesting. Lord Curry of Kirkharle: Apologies, Lord Chairman, for arriving very late. I had a speaking engagement this morning. Can I challenge Professor Morgan’s comments about volatility not having an impact on income? I think it depends on the length of the trough. If you have two successive years, when one is high and one is low, the impact average is minimal. What we are now experiencing, particularly in the milk sector, is a very long trough. I often quote the example of the pig sector in the 1990s. We got up to about 700,000 breeding sows in Britain and our prices plummeted. For ever, pigs have gone up and down; we all historically talked about peaks and troughs in pig production. It is easy to turn the tap on when things are good, but suddenly prices come crashing down. We are

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) experiencing in other commodities now what has been a pattern within the pig industry for ever. In the 1990s, when I chaired the Meat and Livestock Commission, we investigated the experiences of the pig sectors in Holland, Germany and Denmark. When our pig numbers began to shrink and dropped to 450,000—a significant drop in breeding pig numbers in Britain—Denmark increased. This was happening at the same time, in the same cycle of volatility. Our pig numbers declined and Denmark’s went up. Why was that? We carried out an investigation, and the truth was that the Danish pig industry was more resilient for a number of reasons than our pig industry. The big factor was five-year tax averaging. In Denmark, the pig guys knew they were going to have good and bad years within their fiveyear period and they invested, and we did not. It is an interesting example of actions that can be taken to mitigate volatility. I would slightly challenge your answer, because it depends on the length of the trough. If it is a long trough, it will have a significant impact on profitability. Professor Wyn Morgan: I would agree. I do not think we differ. Once you start talking about a trough, you are talking about a low level of price as opposed to volatility. That is a different problem and will affect income, and indeed that is what we are seeing in the dairy sector. I totally agree with you on that. Q10 Viscount Hanworth: Are UK banks sufficiently forthcoming with overdraft facilities in lean years to help farmers, or is their stringency liable to drive them out of business? What has been the history of that? Professor Wyn Morgan: I have to admit that I do not have any evidence to respond to that—I guess in the same way that banks have been under the lens since the financial crisis in relation to what they have been doing with lending since, which was quite tight initially. I do not know whether farming is any different in that regard. I do not have evidence, but we can find that out. Viscount Hanworth: Would anybody else like to come in? Professor Tim Lloyd: I do not have any evidence. Viscount Hanworth: Surely this sort of finance is crucial for the survivability of farmers in lean years. Professor Tim Lloyd: Yes. Lord Rooker: The list in question 7, the impact of price volatility on the farm, has an item missing; there ought to be an (f). To what extent is volatility affecting agricultural land prices? My experience is they only go up. Is that correct?

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) Professor Tim Lloyd: In general it is. Having done my PhD on agricultural land prices, it is of keen interest to me. Indeed, it is one of the very surprising features when you look at agricultural land prices that they have risen very rapidly, even in the last couple of years when agricultural product prices have been in decline or stabilising. That partly reflects how integrated agriculture is with the rest of the economy. Whereas demand for agricultural land used to come solely from farmers for farming purposes, now that land is being demanded by a whole new set of other agents who are not solely interested in its agricultural value necessarily, but as a store of wealth, a hedge against inflation, or indeed for its very profitable tax advantages agricultural land prices are to some extent disconnected from the profitability of farming. There is a whole new set of agents coming into the land market, not just farmers. Economic theory will tell you that, if it is only farmers buying agricultural land to make money from agriculture, agricultural land prices will vary with agricultural product prices. Because that link has been broken, there must be something else driving agricultural land prices and one suspects that it is purchases with other motives than purely agricultural ones. Lord Rooker: If it is the parking of wealth, a bit like these million-pound flats in London, as a safety bank, what is the effect? Can you measure the effect on the output of the farm, which is farm produce? This is clearly a distortion. Is there anything that can be measured in that respect? Professor Tim Lloyd: I am not 100% certain what you mean. Lord Rooker: I am saying that the value of the land is being used for another purpose by non-farmers, although the land is still producing food. Is there an effect from the fact that the land is being bought for non-farm purposes to park money and capital, not necessarily to grow food, although the use of the land is to grow food? Does the use of the land, or their parking the money, have a good or bad effect on the prices of the produce of the land? Is there an effect, or is it just to say, “We ignore the fact, whoever owns the land doesn’t matter. We’re just looking at the volatility of prices of the products”? Professor Wyn Morgan: I guess part of it will be what the rent is, because potentially you will get a response in terms of rent. If this is owned by someone else, but farmed by a tenant, for example, there may be an impact in cost of production. That will not necessarily affect the output price, because that is determined by the market.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) The Chairman: I need to move on to the last section, but I have to ask whether there is any impact of volatility on animal welfare, presumably due to the expenditure available to ensure proper animal healthcare and welfare? Professor Wyn Morgan: I do not think we have any evidence to tie to that. To go back to the general point I made about investments, if we are talking about a volatile period limiting investment, there may be implications. I do not think we have any evidence on animal welfare effects of price volatility. The Chairman: Time is up, but we can take another five minutes to deal with the final question, responding to volatility. Lord Rooker, you were going to lead on this, but others can chip in. Q11 Lord Rooker: I will be brief. We want to know whether the conventional methods that farmers have used in the past to protect themselves from volatility are still valid. Are the financial instruments they have used still available? What types of farmers are using these? Professor Wyn Morgan: They are still valid. There are a number of things. One is around what you actually do in your production and the types of things you do to protect yourself against some of the shocks we were talking about earlier—the science around the seeds you use, the fertilisers you use—to try to be more resilient in terms of production. Then there is the diversification of production, so you are spreading the risk, not just being monoculture, but producing lots of things. Finally, there is the engagement in instruments beyond the farm gate. That can take a number of forms. The major one that is used, particularly in the arable sector, is to contract forward. You make contracts with the next stage in the food chain, whether that is a processor, wholesaler, manufacturer, whatever it is, so you are locking in your price through a contract. That is one way of dealing with some of the volatility. The other ways are to deal in parallel, and that is the use of futures markets. That is a means of trying to limit your overall loss by—in crude terms—offsetting potential losses in the physical market with gains in the futures market, so you take the opposite position in the futures market from what you hold in the physical market. Those are all available. The extent to which they are engaged with is quite variable. Forward contracting is quite popular. Futures markets are not popular; the engagement with those is quite limited across the agricultural sector in the UK. Viscount Hanworth: In the UK, but not elsewhere.

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) Professor Wyn Morgan: More so. It is still not widespread in the sense that 80% are doing it; it is not like that. Certainly in Europe and the US you see a bit more of this. The Chairman: Could I raise a question about insurance, which we have heard is very important in the US, for example, as a tool to mitigate the effects of price volatility, but it does not seem to be used in Europe and the UK? Can you comment on that? Is there more scope to make use of that? We are not only talking about insurance against floods and so on, but basically the price volatility. Professor Steve McCorriston: There are two ways to think about insurance. One is, in a sense, normal insurance and then there is catastrophe insurance, which is the floods and major events. I find it easier to think about those two things separately, because the nature of the risks and outcomes can be very different. On the experience of looking for other ways to mitigate price volatility, I would refer back to the issue of managing price volatility. One of the ways to mitigate price volatility is not to intervene in the market directly and to control prices but to look for these other instruments. Futures markets are a way of insuring against price volatility. You can take out insurance against other things. One of the experiences is that these are much more widely used in the United States than in Europe and certainly in the UK. The issue about insurance, as practised in the United States, is very controversial, because it depends how you benchmark that insurance and whether the public sector should provide subsidies towards that to get farmers to use it. Then you come back into the domain of what the policy should be, whether we should be subsidising it, whether the private sector is supplying sufficient levels of insurance and whether, if the public sector does provide subsidies, that leads to income support as well. Therefore you are getting into this link between income support and risk management. It is a practice that is used more widely elsewhere, including the use of futures markets, than it is in the UK. The Chairman: Before we finally wind up, could I give each of you a brief chance to make any final remark you would like to make? Is there any question that we have not asked you that we should have? Professor Wyn Morgan: There are certainly no questions you have not asked us. Lord Selkirk of Douglas: Can I ask a very brief question, not for answer now, but for written evidence, which we have not touched upon? Foot and mouth disease introduced enormous volatility into the market. We have a very rigid policy on that, but in the Far East I understand they have vaccination and still manage to sell the beef. There are more problems

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Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) here. Is it possible to have a note on that? It is a huge subject, which could suddenly irrupt on the scene. It is not for answer immediately, because it would take too long. Professor Wyn Morgan: Demand shocks are hugely important, and that is a demand shock as much as anything else, because it affects consumer behaviour. We can answer that. Professor Tim Lloyd: It is somewhat unusual in that with a food scare you do not get the spike upwards in price that you do with other types of volatility; essentially it is down. Typically, things are very bad for producers of livestock products because, in the face of a food scare affecting their livestock, demand falls because of the food scare, but so does price as well. Very often we get compensation between prices and output, but in a food scare prices and output both fall, leading to very serious effects on incomes. Lord Selkirk of Douglas: I accept that absolutely. We do not have a very clear view on why Europe should be so different from Asia. There are probably very good answers to that, but I do not know what they are. The Chairman: We would be very pleased to have any written answers. Thank you very much indeed. That concludes the formal session.

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Sir John Marsh — Written Evidence

Sir John Marsh — Written Evidence Summary This addresses directly the first of the topics on which evidence was requested. It argues that price movements should not be frustrated by government policy but that the undesired consequence of volatility should be addressed Some of these demand direct action and often form part of wider environmental or social programmes. Others should be born by the industry and the role of policy is to facilitate adjustment. Price movements are an essential component of an efficient market. They provide signals that clear existing markets in ways that ensure the product is used where it is most valued. They are part of the information that investors must take into account in planning future production. Price movements may fail to achieve their economic purpose if they are impeded by monopolistic practices or by state policy. The history of the CAP shows how by seeking to regulate price movements in the EU substantial wastage was involved both in production and in investment plans in agriculture. Additional wastage occurred as a result of the diversion of public, budgetary funds from uses in which their value to the community would have been greater. Extreme volatility may send misleading signals to the industry. Classically the issue is described in t he traditional pig cycle, where a period of high prices would lead to excessive investment and a subsequent market crash. In the process real resources were misdirected and the cost of technical innovation increased. Price movements may also have substantial damaging social impacts. Producers who have become marginal as a result of increased competition from other sources may be driven out of business. The consequence may be the gradual depopulation of regions, leaving a population of elderly, poor and ill-educated people in dying villages. Such anxieties were one of the legitimate bases for agricultural support under the CAP. It will be argued later, this was an inefficient and damaging response to a real social problem. Price movements for agricultural products may also impact on important environmental externalities. As a major source of ecological services that are not funded directly by the market, changes in farming may impose non-market costs on a community that are of greater value than the gains in market efficiency from allowing prices to move. The goal of public policy should be to facilitate the efficient working of markets. In principle this is concerned with setting the context within which markets function rather than attempting to fix any level of prices. An important part of the context is the quality and availability of information. Recent improvements in IT have opened up new possibilities in the rapid accumulation of data and its interpretation. For an industry comprising firms of very different sizes this may prove to be a way in which the larger and more informed can exploit the poorer understanding of the market by small businesses. Public policy should

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Sir John Marsh — Written Evidence seek to counter this risk by making available up to date accurate information with informed commentary. The importance of scale in information acquisition and management is but one of the factors pressing small-scale farmers into new structural arrangements. These have a variety of forms, co-operation or ‘groups’ among farmers, links with major customers or suppliers a form of vertical co-ordination that may sometimes lead to vertical integration. All these mechanisms are means by which risks can be shared to a greater or lesser extent. In doing so they improve the resilience of the individual business. Public policy in such areas can facilitate or obstruct new structural arrangements. In principle interventions to support small farms or specific farming methods can impede the efficient restructuring of the industry. Extension services that can enable farmers to recognise and evaluate new structural opportunities may lead to more efficient adaptation. The social consequences of price volatility need to be disaggregated into long term and short-term adjustment problems. Where there is an underlying trend in prices extreme movements of price may be the signal that leads to a more efficient use of resources. It should be seen as an element in the adjustment of the economy as a whole, required by economic growth. For individuals and communities this will be painful and some policy initiatives to help people adjust and make provision for transitional compensation can both ease the pain and accelerate the move to a more efficient pattern of resource use. Short-term adjustment problems may feel no different to the market participants but need a different approach. Essentially they form part of the risks associated with production and their costs should be taken into account when investment decisions are made. There are ways in which the sector can adjust internally by sharing risks over a number of different sectors – ‘up horn, down corn’ approach. A possible area for public policy may be to support the creation of a self-funding insurance scheme – designed to accumulate funds when prices are high and make payments when they fall. A functional scheme would be complex to design and manage but in principle government could help at the initial stage by underwriting its early years. Participation would be voluntary but once signed up a business would be committed for at least one complete price cycle – a matter of several years. Intervention to support the provision of ecological services has become an increasingly recognised demand on public policy. Price volatility may result in sudden and acute pressure on some valued service or provide an opportunity for supporting newly recognised services. Here the situations are specific. What matters is that they are recognised and evaluated in terms of the other demands on public funding. The scale of intervention will need to be taken into account – some of the services may be site specific and should be addressed by local policy. Others are much more general and need national or even international initiatives. 15 December 2015

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Professor Steve McCorriston, Professor Tim Lloyd, and Professor Wyn Morgan – Oral Evidence (QQ 1-11)

Professor Steve McCorriston, Professor Tim Lloyd, and Professor Wyn Morgan – Oral Evidence (QQ 1-11) Transcript can be found under Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11)

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Menter a Busnes — Written Evidence

Menter a Busnes — Written Evidence Introduction The following written evidence provides examples of activities that have been delivered by Menter a Busnes under the Farming Connect Programme which is an integrated, high profile, Wales-wide service for farming families and forestry businesses, funded by the European Agricultural Fund for Rural Development and Welsh Government. Its main purpose is to help farmers, foresters and their families to run their business more efficiently and to safeguard the future of their farm. This submission is aimed at answering question 8 of the ‘Call for Evidence’ document. One of the aims of the Farming Connect programme is to build resilience and the objective of the majority of the programmes activities and events is to help Welsh farmers and foresters become more resilient and responsive to changes in their business. Defining resilience The Defra (2009) Supporting Information Document on Resilience and Competitiveness describes resilience as how well placed the industry is to cope with and absorb shocks that might arise together with its ability to use appropriate mechanisms that can mitigate the threats that it faces. Resilience, it argues, also has links with competitiveness in that both are associated with ‘strong’, well run businesses - competitive businesses with improved levels of income and productivity are likely to be better able to manage risk. Improvements to competitiveness are, therefore, also likely to improve levels of resilience. It is important to note, however, that increased competitiveness and efficiency through specialisation can increase the impact of risk on a business as income becomes ‘less diversified’. There is also need to acknowledge that managing risk is not without cost and there will be some trade-offs in determining how best to prepare for risks with a requirement to assess the cost versus benefit of some risk management measures. Measures to improve levels of resilience are also, on occasion, contradictory to increasing competitiveness - which requires high levels of efficiency and minimisation of ‘redundant’ activity and costs. Resilience can rely on the ability to adapt and cope with shocks and may involve maintaining a level of operational flexibility, ability to switch enterprises easily and an element of ‘spare’ capacity that add costs into systems thus reducing competitiveness. Identifying the risks Risks can be considered as those severe shocks that directly test levels of resilience together with longer term challenges which lead to reduced incomes which magnify the impact of other shocks. Some of the risks identified are: Animal health and disease – including exotic disease, crop pest and diseases, extreme weather events, climate change, volatility in markets – input and outputs, exchange rates, interest rates, availability of credit, regulation, reduction in Basic Payments, lack of alternative employment/opportunities to diversify income, health, availability of skilled labour.

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Increasing levels of resilience Possible measures to improve levels of resilience are described below as are the actions currently taken within the Farming Connect Programme. Many are associated with increasing levels of competitiveness within the industry. a)

Diversification – agricultural and non-agricultural

Diversification can provide a proportion of stable income and diversified activity has the capacity to reduce the impact of a shock (i.e not having all eggs in one basket!). Arguably participation in an agri-environment scheme is a type of risk management strategy falling under this category. Programme/mechanism

Activity

Knowledge Transfer Activities ranging from Awareness has been raised and information Demonstration Farm events to workshops provided on a variety of diversification and clinics options (agricultural and non-agricultural) available to farm businesses. This includes ‘start-up’ technical and market information on the smaller sectors including pigs, poultry and horticulture together with renewable energy technologies and farm woodland opportunities.

Diversification Seminars

Planning Surgeries

Agrisgôp

One-to-one support

Diversification seminars – outlining the main factors to consider when embarking on a diversification project Planning Surgeries – one hour surgery with a planning consultant to advise on planning requirements Support for development of new projects either individually within a group or collectively as part of a cooperation project One to one and group advice is available on a range of specific issues up to four times per business over the duration of the project.

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b)

Collaboration and co-operation

Improved levels of collaboration and co-operation can increase levels of resilience. Competitiveness can be increased through measures such as collaborative buying of inputs which can have a significant impact on income together with co-operation which can increase power to farmers who are traditionally perceived as ‘price takers’. Programme/mechanism

Activity

Knowledge Transfer Programme

Farmer Enterprise Competition which encouraged teams to work with key players within the food chain Demonstration Farm Projects eg increasing the shelf life of Welsh lamb

Agrisgôp

c)

on

Examples include groups of farmers who sell their produce direct to market

Benchmarking

Self-assessment of individual economic performance and benchmarking with other similar producers can highlight where improvements can be made leading to increased levels of competitiveness.

Programme/mechanism

Activity

Discussion Groups

Benchmarking is an important priority for the Knowledge Transfer Programme and 36 discussion groups have been established across Wales since October 2015. All groups are encouraged to benchmark certain elements of their business. A new benchmarking scheme has been developed – ‘Measure to Manage’. This new name will hopefully take away the stigma associated with the word ‘benchmarking’.

Advisory Service

Bespoke one to one and group advice is available on a range of specific issues up to four times per business over the duration of the project. 223 of 373

d)

Uptake of Research & Development, new technologies and innovation

Uptake of new research & development and new technologies is an important contributor to resilience through increasing income through efficiency measures. Menter a Busnes and IBERS have recently established a Knowledge Exchange Hub to improve and facilitate the progression of new ideas and technologies to the agricultural and forestry sectors. The Knowledge Exchange Hub will provide a mechanism for assisting the flow of information from research projects into industry as well as keeping abreast of new research and developments in institutes and organisations other than IBERS. This will include research institutes across the UK and world, other knowledge exchange specialist e.g. levy boards, and industrial companies undertaking their own research. In addition the Knowledge Exchange Hub will be the point of contact for farmers and foresters wishing to access funding through the European Innovation Partnerships. Programme/mechanism

Activity


Demonstration Farm projects – outcomes are disseminated to the industry through on farm events Podcasts, Fact sheets, and use of Social Media (facebook and twitter) are used to provide information on new research and new technologies to the industry. Agri Lab and Tomorrow Today exhibition – showcase new technologies and innovation to the agricultural industry

e)

Business management skills

Business management skills are crucial to improve both competitiveness and resilience. Levels of resilience are likely to be increasingly challenged in the future as SPS payments are reduced and increasing the ability of individuals to manage risk and respond to shocks through improved business, risk and other management skills can contribute significantly to resilience. Programme/mechanism

Activity


The Knowledge Transfer Programme places emphasis on the development of business skills and, through all its activity, aims to present information on cost-benefit for a particular action.

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Events have been developed to provide information and develop knowledge on dealing in a professional manner with your bank manager and understanding basic financial information and principles. Agri Academy Business and Innovation – which aims to improve management skills and preparing individuals to better understand future challenges within the agricultural sector Business Review Surgeries - one hour surgeries are available with a business consultant Business meetings – providing information on employment laws, farm accounts, record keeping Venture Programme – joint opportunities eg share / contract farming and one to one succession surgeries with lawyer f)

Animal health and welfare

An outbreak of an exotic animal disease can potentially challenge the resilience of individual farm businesses and sectors whilst endemic diseases reduce production efficiency and impact on animal welfare. Levels of resilience can be increased through the management of risks at the farm level with enhanced levels of understanding of the costs of endemic disease together with Animal Health Planning to pre-empt animal health issues and reduce incidence of disease. Programme/mechanism

Activity


Animal Health and Welfare is a key priority for the Knowledge Transfer Programme and is guided by the priorities establishing by the Animal Health and Welfare Strategy Steering Group. Activity has been delivered against each of the priorities often in partnership with local veterinary practices. Examples include: Discussion Group 225 of 373

meetings on Schmallenberg, Fluke Awareness Meetings; Workshops on BVD, Sheep Scab; Farm Walks on Biosecurity; Demonstration Farm projects Case studies a) Knowledge Transfer Spotlight on activity to increase resilience: Reducing slurry production – Great House Demonstration Farm: As a farm on the edge of a NVZ designation and also near the Olway brook, the environmental impacts of the farms production methods were of key consideration. Calculations on the existing set up at Great House showed that the 100 beef cattle required approx. 200, 000 gallons of slurry store capacity, 90% of which was contaminated rain water. Providing a slurry store to host this capacity would cost between £20,000 for an earth backed lagoon and over £63,000 for a shuttered concrete store. Farming Connect helped Great House to reduce the dirty water volume and avoid this unnecessary investment by installing new guttering and downpipes, harvesting rainwater, removing cattle from open yards. Relocating feed barriers to shed openings and installing lips to sheds to prevent slurry seepage onto the clean yards. These adaptations cost a mere £1,200. Building resilience at Frowen demonstration farm, Carmarthenshire: Some of the key objectives set out by Frowen Demonstration farm to help their business become more resilient to changes in the industry included: 1. 2. 3.

Reduce feed costs of sheep enterprise without reducing production Increase the percentage of lambs reared Increase KG’s of lamb sold per hectare.

The work done at Frowen through the Farming Connect programme helped them to increase lambing percentage significantly and reduce losses resulting in more kg of lamb sold. Feed costs were reduced from £11.03 (per ewe per year) in 2012 to £4.91 (per ewe per year) in 2014. b. Advisory Services Spotlight on specific Building Resilience activity: A farmer had mentoring to look at future direction of business. They had a pedigree herd of Limousin cattle and an excellent commercial flock. In many respects it’s a model farm but even so it’s an example of why financial advice and business planning is still important even when a business looks as if it is doing well. After attending a Soils Workshop meeting, a young farmer decided to undertake a whole farm Nutrient Management Plan gaining 80% funding through FAS. On doing so realised that 226 of 373

the majority of the home farm had P + K' s at a minimum of 2. Having determined a change in fertiliser purchases needed to take place with the majority of fertiliser purchased being straight Nitrogen - therefore a saving has been made making the farm more resilient in the future due to volatile market prices. Attendance on a HGV and LGV courses under the last FC programme has enabled a range of Monmouthshire Farmers to supplement the farm business with part-time off farm income streams that also fit around the main farm calendar year. 3. Agrisgôp Spotlight on specific activity relating to Building resilience: The Dairy Producer Organisation group was established through the support of Agrisgôp. Having secured funding through ADHB/DairyCo, the group commissioned Promar to carry out a feasibility study titled “The Feasibility of a Dairy Producer Organisation in Wales.” The report was completed in December 2015 and published in January 2016. The group will soon be launching a Group Facebook page to allow other producers and businesses in the dairy supply chain to get in touch. The Group continues to meet with the facilitative support of Agrisgôp, and are actively considering and planning how to raise awareness of DPOs over the coming months. Group members have developed links with other like-minded dairy producers in England and Scotland to share information and experience in setting up DPOs. Preliminary discussions with dairy processors in Wales will be taking place in January and February 2016, to consider the scope of setting up Wales’ first DPOs. 5 February 2016

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Menter a Busnes, Agriculture and Horticulture Development Board, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37)

Menter a Busnes, Agriculture and Horticulture Development Board, and Royal Agricultural Society of England — Oral Evidence (QQ 29– 37) Transcript can be found under Menter a Busnes, Agriculture and Horticulture Development Board, and Royal Agricultural Society of England — Oral Evidence (QQ 29–37)

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Professor Wyn Morgan, Professor Tim Lloyd, and Professor Steve McCorriston – Oral Evidence (QQ 1-11)

Professor Wyn Morgan, Professor Tim Lloyd, and Professor Steve McCorriston – Oral Evidence (QQ 1-11) Transcript can be found under Professor Tim Lloyd, Professor Steve McCorriston, and Professor Wyn Morgan – Oral Evidence (QQ 1-11)

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National Farmers Union — Written Evidence

National Farmers Union — Written Evidence The NFU represents 47,000 farm businesses in England and Wales. In addition we have just over 28,000 countryside members with an interest in farming and the country. Executive Summary The dynamics of commodity markets have shifted, volatility has been a fact of business life for farmers over the last decade, and the context for the future too. The agricultural sector has seen changes in farm policy and agricultural support around the world. Many governments have tried to reduce intervention in agricultural markets along with a reduction in tariff and trade barriers to fuel the expansion of trade. Agricultural markets have repeatedly been subject to various shocks. Farmgate prices for key commodities in the UK are in a markedly different place than they were two years ago, with pronounced price drops recorded across the sectors. Uncertainty about prices and margins creates uncertainty about profits. The profitability of the farming industry as measured by the Total Income from Farming (TIFF) fell by 2.0% to £5.4 billion in 2014. Looking to 2016, the opportunities for an immediate turnaround in profits do not look promising. Falling prices and margins have already created financial challenges for some farming businesses. UK farm businesses borrowed a record £17.7bn in the year to the end of October. An increasing level of volatility is most certainly reflected in the confidence of individual businesses. We believe it is the role of public policy to provide effective safety nets for farmers to deal with extreme situations, for example extreme weather events, outbreaks of diseases and extreme shifts in market prices. There is a role therefore for public policy to establish and ensure the effective functioning of such tools to manage price volatility The NFU supports efforts by the European Commission to establish an agri-markets task force to consider new forms of risk management through the CAP. We believe that the direct payments provide an effective risk management function and in parallel these payments are complemented by measures such as intervention and private storage aid through the common market organisation (CMO) regulations. There is also a role for individual farmers to contribute to their own risk management approach by taking a number of steps within their businesses A broader industry wide public response will go some way in building resilience to volatility across the farming industry. However, given the nature and diversity of agricultural and horticultural businesses, sector specific response will be more effective. Greater transparency, along with a rebalancing of power along the supply chain is critical to enable competitive price discovery and engagement in proactive risk management. In terms of mitigating risk, access to accurate market information and tools along with POs and contacts can play a crucial role. We have welcomed the development of some exemplar schemes where farmers, food processors and retailers have worked together to create better supply chains where true

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National Farmers Union — Written Evidence partnership arrangements exist for example the Waitrose dairy group. However, such arrangements are the exception rather than the rule. Contracts can offer pricing mechanisms to offer some protection against the volatilities of the market. We wish to see ratchet types of models developed further across all sectors by large processors, suppliers and retailers. Farmers currently face significant barriers for the uptake of market-based instruments to manage price volatility. Without direct financial trading experience, most farmers lack the technical knowledge and confidence required to utilise market-based instruments. There are low levels of price transparency for the majority of the agricultural sectors. The lack of publicly available data for price and volumes traded impacts “price discovery”, reduces farmer confidence in the pricing of derivatives and ultimately discourages participation in market-based solutions. We believe that achieving lower costs of production with technical efficiency, benchmarking, forward planning and budgeting are all key elements in coping with the challenges of volatility. However, currently the main area of concern for our members is around data protection, ownership and enabling farmers to get value from any data they collect. Gaining the trust of farmers and their representatives by addressing concerns, communicating effectively to non-scientists/technicians and having a robust data protocol in place is essential. In the UK there is a greater need to encourage exchange of information and knowledge amongst farmers. Successful modern farming is a skilled operation that requires technical proficiency, business acumen and environmental awareness. The NFU believes that promotion of business management and entrepreneurial skills is crucial to achieving a professional and more productive, profitable and competitive farming sector. Legislation and Government decision-making must be based on robust scientific evidence if it is to have the desired effect, avoid unintended consequences and stand up to scrutiny. The science must come first, rather than deciding on the policy then funding research to support the decision. Background The dynamics of commodity markets have shifted. The agricultural sector has seen changes in farm policy and agricultural support around the world. Many governments have tried to reduce intervention in agricultural markets along with a reduction in tariff and trade barriers to fuel the expansion of trade. Agricultural markets have repeatedly been subject to various shocks. These are often weather related – the US drought in 2012 and Eastern Europe’s production headaches in 2010. The past year has shown that geo-politics shape agriculture too. It was the food price spike in 2007/8 when these new dynamics in the market first hit home, and global commodity markets have seldom stood still ever since. Prices now seem to move as much from day to day as they used to in weeks or even months pre-2007; often responding to the latest supply and demand prospects from around the world. The chart below clearly shows that commodity prices have been subject to high volatility, weighing heavily on farm businesses. Currently, regardless of what farmers are selling off farm, they are receiving lower prices. The averages for many agricultural commodity prices 231 of 373

National Farmers Union — Written Evidence struggle to meet the break-even point. We can all too often focus on prices, but we all realise that what really matters is margin and across the sectors margins have been squeezed. Graph 1: Evolution in commodity prices remain a major cause for concern for farm businesses

Index 300

Food Price Index

250

Meat Price Index

200 150

Dairy Price Index

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50

Sep-15

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May-14

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May-10

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May-08

Sep-07

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May-06

Source: FAO Food Price Index

Sep-05

Jan-05

May-04

Sep-03

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May-02

Sep-01

Jan-01

0

Cereals Price Index

Farmgate prices for key commodities in the UK are in a markedly different place than they were 22 months ago, with pronounced price drops recorded across the sectors. There are a number of common factors influencing all or most sectors, along with some sector-specific issues. Global production has been strong across most major agricultural commodities, due to the lack of any major weather events in the last two or three years. In addition, the stronger pound exerted pressure on the sector’s profitability in 2014 and continues to be a critical factor in determining commodity prices. The euro-pound exchange rate used to calculate Basic Payment Scheme (BPS) payments was confirmed at €1=0.73129p on 30 September. This is a drop of about 6% on 2014 and is the lowest rate in eight years. English farmers will see £91 million wiped off the value of the BPS this year due to the strength of the pound. Uncertainty about prices and margins creates uncertainty about profits. The profitability of the farming industry as measured by the Total Income from Farming (TIFF) fell by 2.0% to £5.4 billion in 2014. Looking to 2016, the opportunities for an immediate turnaround in profits do not look promising. Forecasts across the sectors show that the higher supply situation, which has prevailed over the last year or so, is set to continue and it is possible that prices will remain under pressure in the medium term. Falling prices and margins have already created financial challenges for some farming businesses. UK farm businesses borrowed a record £17.7bn in the year to the end of October. This was an increase of 10% on a year earlier and marks the fourth year in succession that borrowing has risen by more than 7%. Although estimates vary, up to 40% of 232 of 373

National Farmers Union — Written Evidence new borrowing is thought to be for coping with the cashflow squeeze, which has been exacerbated by further falls in arable and livestock prices in recent weeks. We expect the cashflow situation to worsen for many farm businesses over the winter months. Graph 2: Agriculture borrowing continues to grow £ millions 19000 18000 17000 16000 15000

14000 13000 12000 11000

Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15

10000

Source: Bank of England

An increasing level of volatility is most certainly reflected in the confidence of individual businesses. Confidence feeds through to investment and making investment decisions for the long term; in buildings, in farm infrastructure, against a backdrop of increased volatility is challenging to say the least. The latest NFU Farmer Confidence surveys shows that next to regulation, low prices are a significant drag on farm business confidence and long term investment planning. Q1 What is the role of public policy in mitigating the impact of potential price volatility? To what extent should the response be a shared endeavour between the EU institutions and Member State governments? What are the differing roles of industry on the one hand and individual farmers on the other? We believe it is the role of public policy to provide effective safety nets for farmers to deal with extreme situations, for example extreme weather events, outbreaks of diseases and extreme shifts in market prices. There is a role therefore for public policy to establish and ensure the effective functioning of such tools to manage price volatility. Agricultural policy is established at the European level given the common market in agricultural goods that UK farmers operate within. It is essential that the European Commission takes the lead in establishing the necessary tools for farmers. The Common Agricultural Policy provides the framework for such measures. The NFU supports efforts by the European Commission to establish an agri-markets task force to consider new forms of risk management through the CAP. The risks from price volatility faced by farm businesses have grown as the successive reforms of the CAP have reoriented the policy from price support to direct payments. The changes that have been occurring through EU policy therefore potentially expose farmers to more price variability. However the NFU supports the progress towards a more market-led agricultural sector. Fundamentally the CAP helps to address the failure of agricultural markets to deliver fair and profitable returns to farmers. With commodity prices at current 233 of 373

National Farmers Union — Written Evidence levels, farm incomes would be unsustainable without CAP support and many would cease production. We believe that the direct payments provide an effective risk management function and in parallel these payments are complemented by measures such as intervention and private storage aid through the common market organisation (CMO) regulations. The CMO also provides the opportunity for farmers to operate through established producer organisations. The possibility to collectively market produce through recognised producer organisations is still developing in the UK, but does offer potential to help manage volatility. There is a role for Government and industry bodies to promote the use of such measures to farmers, to explain the benefits and ensure widespread availability. We are concerned that as a result of successive CAP reforms and different attitudes to market management in member states, the CAP is becoming less common. This is concerning as it can lead to distortions of competition and a lack of a fair playing field for all EU farmers. For example we see some member states implementing, through the rural development regulation, “risk management toolkits” which include insurance for crops, livestock and plants; mutual funds that respond to a range of adverse situations and income stabilisation tools. Given the fact that the UK receives the lowest allocation of rural development funds of all member states and the government’s focus on environmental stewardship, this measure is not available to English farmers. We would like to see an evaluation carried out of the effectiveness of such toolkits and if there are benefits to such approaches, these should be shared more widely. There is also a role for individual farmers to contribute to their own risk management approach by taking a number of steps within their businesses. For example it is essential that all farmers consider their costs and seek ways to reduce these where possible. To fully understand cost of production, farmers may undertake benchmarking comparisons of their costs with comparable businesses and also to industry averages. Farmers may also consider the way in which they buy and sell inputs and outputs from their business. Farmers should have access to a range of measures to help them to manage volatility. These measures should be accessible and easily understood. There is a role for government to ensure this is the case. Q2 Should public policy responses make a distinction between support for the resilience of the industry as a whole, support for the resilience of specific sectors and support for the resilience of individual units of activity? While it is not possible to influence the laws of supply and demand, there are actions that can be taken to address volatility across the industry as a whole. A broader industry wide public response will go some way in building resilience across the farming industry. However, given the nature and diversity of agricultural and horticultural businesses, sector specific response will be more effective. This is particularly true for sectors where tools to manage volatility are underdeveloped, for example dairy. The NFU has identified a number of barriers at the sector level, that we believe if addressed will provide growth. A successful growing industry will inherently be one that has built greater resilience within itself. These barriers and accompanying solutions as identified by the NFU can be read in our submission to Defra’s 25 year Food and Farming Plan (provided as an Annex 1 to this submission), which emphasised that Defra needs to approach the plan from a sector-by-sector perspective mindful that each starts from a different place. 234 of 373

National Farmers Union — Written Evidence Q3 Currently, what are the key elements involved in the industry’s management of price risk? What further tools are needed? Different sectors currently have different levels of ability to manage price risk. For example: 

Pigs and poultry are integrated so changes in feed price and costs of production tend to get reflected

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Wheat has a futures market, offering ability to sell crop forward as well as giving an indication of price levels.

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In dairy, some liquid milk contracts are based on a cost of production mechanism but this covers only a proportion of the sector (less than 20%)

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Beef and sheep – less integration in the supply chain, with few contract agreements and no futures markets to indicate price levels.

The NFU will consider further in 2016, in partnership with organisations such as AHDB and through the European Commission’s Agri Market Task Force, specific development of new measures. Given the lack of tools, priorities for new measures are the manufactured dairy products sector (milk powders, butter, cheese) and red meat (where typically farmers are pricetakers. Anecdotal evidence from NFU members shows they would certainly like to see something that gives a better indication of where the beef or sheep price is going to be at some point in the future. A solution that the NFU would like to see explored much further is long-term contracts, which would focus on carcase specification as well as start to give some degree of security and indication of where price may be. More generally, a lack of reliable and up-to-date information on supply, demand, stocks and export availability can contribute to price spikes. Enhanced market information and early warning systems would enable both governments and the private sector to plan ahead. Governments would be able to more accurately assess needs, make budgetary provision for producer and consumer safety nets and better position emergency food security reserves. Better market information and analysis could reduce uncertainties and assist producers, traders and consumers to make better decisions. It is important to note that many in the industry are price takers as they have limited visibility of market prices or volumes traded. The lack of market transparency can make it difficult for farmers to formulate risk management strategies. Intermediary organisations such as processors and retailers benefit from asymmetric price information which allows these organisations to dictate market prices. Often farmers hold out for an acceptable market price or sell only as much as is required to manage cash flow during times of low prices. Greater market transparency, along with a rebalancing of power along the supply chain is critical to enable competitive price discovery and engagement in proactive risk management. Whilst they are becoming increasingly common, only a minority of farming businesses currently engage in cost-of-production contracts and futures trading.

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National Farmers Union — Written Evidence Q4 What effect has the commoditisation of agricultural goods had on the ability of farmers to respond to risk effectively? How are farmers to mitigate the onfarm effects of volatile global commodity markets and currency fluctuations? The commoditisation of farm products has no doubt led to increased pressure on farmers’ ability to respond to risk effectively. This is particularly true when prices are moving much more on a day-to-day basis (in some cases on an hourly basis), reacting to external market signals. In terms of mitigating risk, access to accurate market information and tools along with POs and contacts can play a crucial role. Other areas such as differentiation and adding value still a route to mitigating risk such as organic in dairy, or Channel Islands milk. However, this may not suit every business and sector. Q5 What are the barriers to more effective on-farm price risk management, including longer term pricing mechanisms, diversification, co-operative working and leasing? How can those barriers be overcome and what is the role of EU and national public policy? We have welcomed the development of some exemplar schemes where farmers, food processors and retailers have worked together to create better supply chains where true partnership arrangements exist for example the cost of production mechanisms in place on liquid milk offered by Tesco, Sainsburys, Waitrose and the Co-op. However, such arrangements are the exception rather than the rule and all too often, pressure is driven down the supply chain, which producers fall victim to. One way of improving relations is formal contract models and longer term relationships. This model does not need to be directly between a retailer and a farmer. However, by formalising relationships with suppliers, this security can be passed down the supply chain and benefit farmers. Going further, those contracts can offer pricing mechanisms to offer some protection against the volatilities of the market. On example of this is cost of production linked mechanisms, which are already used for a proportion of our liquid milk supply. However other methods, including feed ratchets and indicator models also exist. We wish to see these models developed further across all sectors by large processors, suppliers and retailers. The widespread support for and positive implementation of the Grocery Code Adjudicator has helped to highlight and address this issue for those processors supplying directly into the top ten retailers. The NFU lobbied long and hard to get the Grocery Supplier Code of Practice and subsequent GCA up and running. This year, we’ve seen the powers extended, with the Grocery Code Adjudicator given the ability to fine businesses that don’t abide by the code up to 1% of their turnover. Further afield, the European Commission is looking to put in place legislation to facilitate this, and look to the UK as an example. It’s a move that the NFU would support. Similarly, it’s still early days for producer organisations, but we think they have a role in helping redress the nature of relationships, but the UK farmers lag behind EU counterparts. Dairy Crest Direct became the first Dairy PO earlier this year; Lactalis in Scotland is making progress. However, there is a need to issue clearer guidance on how farming cooperatives and producer organisations can collaborate to market and price their produce. Learnings can be taken from the horticulture sector. Q6 How ‘fit for purpose’ are market-based instruments? Could the marketplace help to mitigate risks by providing ways of smoothing out the impact of

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National Farmers Union — Written Evidence volatility? Are there ways in which EU and national public policy could encourage, and reduce the risk of introducing new financial products? Farmers currently face significant barriers for the uptake of market-based instruments to manage price volatility. As individual enterprises, the majority of farmers lack the scale required to directly engage in a futures market and therefore currently rely on processors and traders to utilise such market-based instruments in order to manage volatility. For farmers to directly benefit, financial products must consider the scale of farming operations. Such products must be accessible for small and medium sized enterprises. Alternatively farmers will be required to operate as part of producer organisations in order to achieve the scale required to access solutions such as futures markets. Without direct financial trading experience, most farmers lack the technical knowledge and confidence required to utilise market-based instruments. Whilst market-based instruments may support risk management, engagement in such markets requires a significant technical and cultural leap for many farming businesses who are not accustomed to utilising such measures. The introduction of new financial products must be accompanied by a campaign to educate farmers on the applicability of such products to their business. As an ancillary activity for farmers, market-based instruments must be easy to implement and manage. The current deficiency of knowledge of sophisticated financial products is a key barrier to the uptake of any market-based solutions. There are low levels of price transparency for the majority of the agricultural sectors. The lack of publicly available data for price and volumes traded impacts price discovery reduces farmer confidence in the pricing of derivatives and ultimately discourages participation in market-based solutions. Greater market transparency will encourage participation in the financial markets as no participant in the supply chain will be able to benefit from asymmetric information. Due to the current lack of price transparency, processors and retailers have greater control over price discovery and therefore are not incentivised to engage in a futures market. The European Milk Market Observatory looks to achieve greater transparency for the dairy sector but the programme is still in its infancy. Insurance schemes, volatility-proofed loans and loan guarantees have lower barriers to entry as farming enterprises are familiar with these product types. Such products may also be accessed by existing small and medium sizes enterprise. Futures markets represent the largest barriers due to the technical and structural issues within the industry. Market based instruments such as futures can work well in the cereals sector given the nature of the product. It can be stored and shipped globally and there are many sellers but more crucially, many buyers. A sufficient number of different market participants (buyers and sellers); a critical mass of underlying commodity that wants to be hedged; and a willingness of participants to trade the contract. However, there are many challenges in operating futures in other sectors. The perishable nature of milk for instance would need a complex delivery procedure – risking the market’s representativeness of the physical market. This is because of the relatively specialist and/or perishable nature of the product. Cost and access is also an important element when it comes market based instruments. With the majority of farming enterprises being small businesses, they are unlikely to be able to access futures markets directly due to regulatory and cash requirements. Having a broker or an intermediary can incur operating cost.

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National Farmers Union — Written Evidence Q7 How realistic are terms for access to investment finance? What role is there for the European Investment Bank to support on-farm investment at a low cost? What other instruments could improve access to finance in a volatile environment? The EIB can certainly play a role in risk management. Firstly, the concept of guaranteeing the loan funds means that the EIB could make up to 80% of the shortfall if repayments are defaulted upon, depending on the design of the product. This greatly reduced risk means that certain benefits can be conveyed to farmers. For example, the commission and EIB are currently considering “Volatility-Proofed Loans” for dairy. The loans must be used for investments that boost a farm’s productivity or sustainability (business-wise and/or environmentally). Our current understanding of the details are: 

Interest rates would be low and loans could last up to 15 years.

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Repayments would be dependent on the milk price. At times of “normal” or higher prices, repayments are at a pre-agreed level and frequency. However, during times of lower prices, it is understood that repayment amounts and frequency could be reduced.

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If prices get very low, there is even the possibility of taking a break from payments for a period of time.

Such terms/products could also be used for other sectors too if this concept proves successful. There are obviously huge benefits to these terms from a risk management point of view – farmers could still invest to grow, have more incentive to do so and have a reduced risk of financial problems from doing so. Q8 What level of information is available to farmers to engage with marketbased instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation? Volatility is here to stay in today’s global market place and as such, farm businesses will have to be at their very best. We believe that achieving lower costs of production with technical efficiency, benchmarking, forward planning and budgeting are all key elements in coping with the challenges of volatility. In recent years benchmarking has been seen of paramount importance in improving the performance of agriculture. Various studies have identified the importance of agricultural business management in improving business performance. Analysis from the 2011/12 Farm Business Survey showed that 15% of farmers who frequently benchmark at whole farm level achieved an average Farm Business Income (FBI) of £128,900 in contrast to £63,000 for the 85% of farmers that did not benchmark. In the UK there are various tools available to producers to help to benchmark production and assess areas for improvement such as Cropbench, Stocktake and Interpig as provided by the AHDB. Farm Business Survey data, which is not widely used by farmers, offers free, confidential farm benchmarking service to farmers across England. Participating farms receive a detailed set of farm management accounts with a comparative analysis against a group of similar businesses.

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National Farmers Union — Written Evidence Sector-specific comparison of costs of production data provides important insights. This in turn allows appropriate research and knowledge transfer activities to be targeted towards obtaining relevant knowledge and expertise. In the UK there is a greater need to encourage exchange of information and knowledge amongst farmers. There is lots of knowledge available to improve many businesses that is not being taken up. This could be better circulated. Automated data gathering, up-to-date market analysis and effective dissemination can play a key role in the future, with the advent of big-data. The NFU supports the establishment of the new Agri-Metrics Centre launched at the end of 2015, which could become a hub of financial and technical comparison data for the UK or the agricultural costings organisations might become more pro-active in providing such data. However, currently the main area of concern for our members is around data protection, ownership and enabling farmers to get value from any data they collect. Gaining the trust of farmers and their representatives by addressing concerns, communicating effectively to nonscientists/technicians and having a robust data protocol in place is essential. To address the future challenges and pressures that farming faces the development of people working in the sector has to be viewed as a high priority. Successful modern farming is a skilled operation that requires technical proficiency, business acumen and environmental awareness. The NFU believes that promotion of business management and leadership skills is crucial to achieving a professional and efficient workforce. Business management training will enable all employers to develop their workforce, increase productivity and provide greater flexibility in responding to changing priorities within a business. Without these skills the potential of technical training, innovation and staff across the sector will never be fully realised. This training will also help encourage further skills training and development to become routine and continuous. To be successful in promoting skills development and integrating professional development into the agriculture and horticulture industry a shift in culture is required. Skills development should no longer be viewed as a compliance issue which adds cost, but be acknowledged that investment in continued professional development and learning is vital to improving business performance, competitiveness and sustainability. To shift this perception there is a need to adequately demonstrate the benefits and advantages that accrue from investment in skills development and so enable it to be valued in the same way as any other investment. The production of case studies will be important here, but the introduction of blended learning programmes which combine high level technical training with aspects of business training will also help. The AgriSkills forum is also helping to promote skills development as being central to business improvement. The AgriSkills forum is a cross-industry initiative which seeks to address skills and training issues within agriculture and horticulture and the NFU is a founding member of this initiative. The forums’ skills strategy aims to promote skills development and embed the concept of professionalism to help the industry improve its resilience and competitiveness in a volatile market. While a change in perception is needed amongst agricultural businesses, it must also be highlighted that the training landscape for agriculture businesses has always been a complex and confusing one for farm businesses to understand, with regards to training and skills 239 of 373

National Farmers Union — Written Evidence provision, professional recognition, and professional development. There is concern that this landscape could be further complicated through a range of different industry initiatives and programmes. There are also challenges around the range of qualifications, complexity and variability of funding streams, inappropriate delivery mechanisms, and lack of understanding as to where to source skills development. Education and knowledge exchange providers can improve this situation and encourage farmers to invest in skills development by working together to provide an industry-wide training platform, and using everyday language to essentially ‘hide the wiring’ from the customer. There are also concerns regarding the provision and cost of training. According to the UKCES skills assessment report in 2012, the average expenditure on workforce training in agriculture is the largest of any sector. This may relate to the nature of the training in the sector; for example where training involves using high risk or expensive machinery there may be higher costs, and the geographical location of businesses making workforce development more costly. To encourage farmers to acquire the skills needed they need to be able to access training on a national basis and this training must be affordable. The 2015 NFU Farmer Confidence Survey shows that increasing investment in skills and training is a priority across all sectors, in particular poultry and dairy. It is important that business owners and employees in the sector have easy access to training and skills development is delivered in numerous ways in order to take the industry forward. The NFU welcomes the development of a land-based National College which should help agricultural and land-based colleges and universities to work more collaboratively to offer a better training experience for businesses and ensure that there is easily accessible training and skills provision available on a national basis. Q9 What role should innovation play in creating a more resilient agricultural sector? Should more be invested in scientific research which could have the potential to transform agricultural practices? Scientific advances have led to increases in agricultural production, and we should be in no doubt that research and development are absolutely vital if farmers are to increase business resilience and productivity in a sustainable fashion. It is deeply disappointing that EU policy and legislation appears sceptical at best, often opposed, to new technologies that offer farm businesses the ability to manage plant and animal disease, weeds and pests, so reducing the EU food system’s ability to manage volatility sustainably. We are still feeling the effects of the well documented underinvestment in agricultural science over recent decades, a shift in focus away from production, and the reduction of people and resources needed for translational research and commercialisation. A functioning research pipeline and effective knowledge exchange infrastructure are essential to enable farmers to benefit from government-funded research. Private sector investment in agricultural research and development also has a part to play, and the NFU works to encourage private companies to continue their valuable work in areas such as plant breeding, crop protection and animal health. Nevertheless, public sector investment fulfils a unique, essential role in taking a long-term, pre-competitive view of the needs and challenges of UK agricultural production. We therefore need to plan in terms of a forward thinking growth strategy for UK science, not a short-term parliamentary cycle. The NFU has been encouraged by moves to strengthen the links between research and practice through the development of the Agri-tech Strategy; but the strategy must deliver for the long term in all sectors. The UK Government has a duty to maintain world class 240 of 373

National Farmers Union — Written Evidence expertise and facilities in this area, and crucially it must ensure that developments and breakthroughs are effectively translated into commercial practice on farms across the country. Likewise, the end users of innovation need to have the right skills to be able to make the best use of the appropriate research and technology available to their business. Legislation and Government decision-making must be based on robust scientific evidence if it is to have the desired effect, avoid unintended consequences and stand up to scrutiny. The science must come first, rather than deciding on the policy then funding research to support the decision. Q10 How effectively does EU agricultural policy currently assist farmers to mitigate the impact of potential price volatility? Is there a need for management of price risk to be an explicit objective of the Common Agricultural Policy? We should reject steps to manage price risk as an express objective of CAP that would undermine what has been a steady move to decouple EU policy from price distorting activity. Instead the CAP provides decoupled pillar 1 payments as a safety net measure. Consideration of alternative measures through the CAP ultimately requires funding and, most likely, would reduce the direct payments budget. Invariably, developing a new tool risks undermines an existing one. However, there are a number of potential areas that can be addressed: 

In the long run, opening up alternative markets through trade agreements offers greater opportunity for disposal of surplus output.

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Promotion mechanisms must be quicker to respond and need to be effective

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There is potential for the European Investment Bank (EIB) to provide investment support for small and medium sized enterprises in the agriculture sector.

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Address Unfair Trading Practices (UTPs) in the food supply chain, ensuring that UK producers exporting into the EU have similar safeguards to those supplying UK retailers and pushing to stamp out UTPs across the EU

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Significantly strengthen Country of Origin Labelling across all food lines at the European level, providing opportunities for UK farmers and food companies to market their products and for UK consumers to actively support them through their purchasing.

Q11 What long term changes should be made to the Common Agricultural Policy to support the agricultural industry in responding to price risk more effectively? Should insurance schemes play a more prominent role? The NFU has been a strong advocate of reforming the CAP over many years. We see logic in developing mutual funds and insurance schemes, but experience has shown that these schemes are likely to be complex and may undermine the value of the decoupled payments, themselves essential risk management tools. It is therefore vital that such schemes are developed with end user (i.e. farmers) in mind and in the first instance be optional rather than compulsory. The NFU welcomes the creation of the European Commission’s Task force on market volatility and will seek opportunities to be actively involved. 6 January 2016 241 of 373

National Farmers Union, Country Land and Business Association, and Professor Paul Wilson — Oral Evidence (QQ 12–23)

National Farmers Union, Country Land and Business Association, and Professor Paul Wilson — Oral Evidence (QQ 12–23) Transcript can be found under Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23)

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28)

National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28)

WEDNESDAY 16 DECEMBER 2015 12 pm Witnesses: Lynsey Martin and George Dunn

Members present Lord Bowness (Chairman) Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Krebs Lord Rooker Lord Selkirk of Douglas Viscount Ullswater Baroness Sheehan ________________ Examination of Witnesses Lynsey Martin, AGRI Steering Group Chairman, National Federation of Young Farmers’ Clubs, and George Dunn, Chief Executive, Tenant Farmers Association

Q24 The Chairman: Good morning—well, not quite morning. It is in this building, actually, for reasons I will not go into, as there is not time. Thank you very much for coming to give evidence to the Sub-Committee. Unfortunately, the Chairman, Baroness Scott, is not well and cannot be here today. As you know, we are doing a short inquiry into responding to price volatility and creating a more resilient agricultural sector. Can I say to you formally, for the record, that this is a formal evidence-taking session of the Committee? A full note is taken and is put on the public record, in printed form and on the parliamentary website. You will receive a copy of it to make any minor corrections, although it will already have been put on the website. The session is on the record, is being webcast and, in due course, will be accessible from the parliamentary website. You have been advised of the interests of members of the Committee. If there are any relevant 243 of 373

National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) interests, they will declare them this morning when they first speak in this session. We have only half an hour, I am afraid. As you know, the purpose of the session is to understand the reality of the situation for two specific groups: young farmers and tenant farmers. I do not know whether either of you would like to say anything in opening or whether you are happy to go straight to the questions. George Dunn: I am happy to go straight to questions, Lord Chairman. Lynsey Martin: Yes. The Chairman: All right. We will go straight to the questions. I will leave it to you to decide who answers the question. I do not want to stop you saying something, but if you agree totally with the answer that has been given or have nothing to add, that is fine. No doubt you will indicate that. Can I go to the first question? How does the impact of price volatility differ, if it does, for young and tenant farmers, compared with the situation for older farmers and owner-occupiers across the United Kingdom? In your view, are the effects of volatility—we are talking about volatility, not low prices—a significant factor in the UK today, or do you experience other, more significant issues? Who would like to start? Lynsey Martin: After you, George. George Dunn: Thank you very much, Lord Chairman. I would highlight four areas of specific difficulty to the tenanted sector from agricultural volatility. The first is the most obvious— the rent that the tenant farmer has to pay. It is fixed for a period. On an agricultural tenancy, the period the rent is fixed for is largely three years. Even when there is an option for a review, it tends to be a pretty sticky thing. It is very difficult to get it moved—sometimes up or down—when there is volatility in the marketplace. There are massive frictional costs involved in reviewing a rent. You might have a rent for a holding of £20,000, but if you ended up in dispute with your landlord, at arbitration, you could spend £40,000 or £50,000 just to argue the difference between you and the landlord on that rent. Despite the fact that we have had expert determination added by the Deregulation Act this year, as a means of resolving disputes, sadly, the way in which the Government has implemented it is not very effective for reviewing rents. Rent is a big area of concern when you are in a volatile market. It is also more difficult when tenants are faced with the desire to combine other economic activities on the holding. Ross Murray said that the land was very important and that you could do great things with it and diversify. Tenants do not always have that option, because they are required to be farmers by their tenancy agreements and often landlords are not very open- handed with consents to do other things on farms.

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) Thirdly, there is the issue of capital values, which was also raised in your previous session. The tenant farmer does not have access to the capital value of the land, so when he or she needs extra borrowing to sustain themselves through a volatile period, particularly a low volatile period, sometimes that is a bit of a stumbling block. Lastly, for people who are on farm business tenancies—we call them the new style of tenancies, but they have been around for 20 years, since 1995—a big issue in managing volatility is that they are incredibly short in length. The average length of term is just over three years. In a volatile market, that gives you no time at all to have the ability to manage the highs with the lows. Those are four specific areas of concern to the tenant sector. Lynsey Martin: Access to finance is a major area of concern for young farmers. If you are going into it with limited capital or a limited credit record, it is very difficult, as George mentioned, if you do not have land or anything to borrow against. Without a secure form of contract for whatever you are producing, whether it is arable or livestock, young farmers find it very difficult to get some sort of finance. We work a lot with the European Council of Young Farmers—CEJA—which is currently undertaking measures to help to collect evidence on how young farmers are accessing finance. It is also looking into the possibility of somehow coming up with loans that would be backed by the European bank. If you are trying to borrow, it is about having a guarantee for your finance, which a lot of young farmers and new entrants do not have. Young farmers are quite good at being opportunists. Where possible, they look at ways of using land when it is not in use by owner-occupiers or other tenant farmers, but support for collaborative businesses, share farming and more innovative ideas is always welcome. That is the way a lot of young farmers are now starting in the business; they are helping out with rotations on farms and things like that—just taking every opportunity that is available to them. Promoting and giving backing to those ideas, where they are successful—whether it is share farming or any other sort of innovation—would help, because everybody is always sceptical about taking up new things and ideas. If those were promoted, where they are working successfully, it would really help. The Chairman: Thank you. Can I ask one question? You talked about the rents, the reviews and what have you. What is the general practice on who receives the single farm payment, under agreements? George Dunn: Within a tenancy agreement, where it is a proper, bona fide tenancy agreement, it is for the tenant farmer who has the land at his or her disposal to make the

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) claim for the basic payment. It does get slightly more complicated, because there are some newer arrangements where individuals are required, once they have claimed the payment, to pay it to the owner of the land as rent, plus something else on top of that. It can get quite complicated in actuality. However, it is the tenant farmer who makes the physical application. The Chairman: How widespread is the provision to pay it over? George Dunn: It is not that widespread, but if there is one case where that happens, it is one too many. There has to be a reasonable basis upon which an individual has access to land to run their business. Lord Curry of Kirkharle: George, I chaired a seminar here for you on the whole issue of the length of FBTs and your campaign to draw attention to the fact that short-term FBTs are unhelpful. Do you think that you are making progress on addressing that issue? George Dunn: We have done all the easy things. We have done all the awareness-raising, the campaigns, the conferences and the seminars, one of which you kindly hosted for us in this place back in the summer. We have gone a significant amount of distance on the moral arguments. Organisations such as the Duchy of Cornwall, the National Trust and the Duchy of Lancaster—large landlords who are concerned about the sustainability of the sector—are responding positively, in my view. More widely, sadly, the private landlord sector is still not responding at all. Indeed, your previous witness from the CLA does not seem to think that there is a problem in this respect, but clearly there is. We are discussing with the Government both the legislative framework and the fiscal environment—the taxation environment—within which landlords make decisions, to try to get a better framework for longer tenancies. Viscount Ullswater: Perhaps I should declare an interest. I am a trustee of a landed estate in Cumbria, on which there are a lot of let farms. George Dunn: We know you well. Q25 Viscount Ullswater: That really has nothing to do with the question I am asking. You have answered a great deal on the main challenges and opportunities for both tenants and the young, but do you believe that you have the tools and the knowledge to utilise opportunities? I know that you have addressed some of the opportunities that young people have, but I would like you to continue with that. How can they engage successfully with the challenges and opportunities of price volatility?

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) George Dunn: There definitely are tools. The question that I would seek to ask is: are those tools sufficient, and do they work properly for those who need to use them? For example, we have talked a lot about contracts and the ability for people to lock into a price for a contract. Typically, that has been something that the cereal and potato sectors have been very good at using, although we find that, where the farmer is involved in that contract process, often it does not work as well as it might in theory. Let me give you an example. At a time when prices are quite low in the spot market but where the contract has locked in quite a high price, so that the farmer is getting much more than the spot market would offer them under that contract, we find that purchasers keep a stronger gimlet eye on issues of quality, timeliness of delivery and whether there is sufficient bushel weight. They use all the mechanisms that they possibly can to suggest that the load should be rejected from that contract, and quite often the farmer has loads back because of that. There are mechanisms out there, but we still very much think that the farmer is the weakest point in the chain in that respect. Viscount Ullswater: Would you say that the contracts are really not fair contracts, or that they are too loaded and one-sided—too loaded to the purchaser, rather than the supplier? George Dunn: My Lord, it is not a magic wand. It does not solve the issue completely. Yes, there are tools. Another example is producer organisations in the dairy sector, much talked about at the moment; they give people the ability to come together and negotiate terms and price. Although that tool is available, it is not very well used in the dairy sector. Perhaps there is something that retailers can do. If a retailer wants to trade with a major processor, perhaps the retailer could require that processor to operate through a producer organisation, which would give farmers a greater sense of their ability to negotiate. Lynsey Martin: For young farmers, there are tools, to which George has alluded. Business planning and business training are things that can always be better utilised when it comes to negotiating contracts and knowing what all the clauses actually mean. It is about making sure that when they get on college courses in business training, those are fit for purpose and that, where possible, there is continued professional development. Obviously that has to come with an attitude that such training courses are an investment in the future of the business and not just time away from the business. That will be down to the individual. A lot of us know the agricultural side inside out, but business is a slight step away from what we are used to. To be effective managers and owners, whether as tenants or landowners, running a really efficient business, more business-focused training will always be useful.

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) George Dunn: Farmers are very skilled and intelligent individuals. Last week I was asked whether I farmed, as well as running the TFA. I said that I was not smart enough to be a farmer. We expect farmers to have a wide range of skills. We expect them to husband their crops and animals and to deal with environmental management, biodiversity and water management. We expect them to be chemists and physicists, and now we are asking them to be speculators as well. The range of issues that we expect farmers to take on board is enormous. Q26 Lord Curry of Kirkharle: I omitted to make my declarations in the earlier session. Just for the record, apart from having lots of interests, all of which are on the public record, I am a tenant farmer. I am interested in the whole area of public policy and whether it is designed appropriately to address issues such as volatility and its negative impacts—whether there is more that we should be doing or whether it concerns our Government’s response to the ability within EU policy to adopt certain measures. It would be interesting to hear whether you think that we have done enough. Is there more that we should be considering as regards how public policy is designed and implemented? George Dunn: The biggest piece of public policy that is attempting to smooth out volatility relates to the Pillar 1 payments under the Common Agricultural Policy. As you know, this year there is great concern right across the UK about the extent of early delivery of that money, particularly in a year that has been quite difficult across the piece for most farmers. That is by far the biggest chunk of money. It is a pretty blunt instrument, but we have to abide by the European rules. Sadly, the last reform was not much of a reform when we looked at it in detail. We also have the Groceries Code Adjudicator, who is there to look at fairness within supply chains. Within the Tenant Farmers Association, we have been arguing for some time that her powers need to be extended. In relation to this Inquiry, there is one area where we think that it would be useful to have an extension of her powers. She should not be involved in setting price, but she should be involved in reporting on price and margins, so that she can provide information about the extent to which retailers, processors and farmers are gaining in the supply chain. It would provide an enormous amount of information in the negotiation of contracts and those things going forward if she had powers to report on the value of the price and who was getting that out of it.

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) If we look at wider public bodies, there is a big role for AHDB, which has a budget of £65 million a year. We have been challenging AHDB—the Agriculture and Horticulture Development Board—to do more in this area for the development of the sector. We are quite pleased to see that the body is in listening mode. What we worry about is the extent to which Defra wants to take an executive role in running the organisation. Of course, it is paraifiscal money, so the Government has a role to ensure that it is not being wasted, but we would argue that Defra should take a more non-executive role in the body and allow AHDB to do what it needs to do to support the sector going forward. Lynsey Martin: As young farmers, we think that public policy is there to help us, but it is also quite slow. That is just the nature of the beast. It is evidence-based, research-based and procurement-based—hopefully, everything that we want it to be. What we need are practical measures and for policy to be communicated in such a way that it is easily interpreted by everybody who is trying to use it and not in such a way that it could possibly be misconstrued in certain areas. I come back to business. BIS is just as useful to us as Defra, moving forward. It is about having access to all the tools that we can use to improve our business and make it more efficient. Lord Curry of Kirkharle: Can I tease out a bit more? George, I remember very well that you were enthusiastic about the retirement scheme. If we accept that older or more inefficient farmers will be the victims of price volatility rather more than younger, wellequipped farmers, you will be quite keen, as I know you were, that that should be part of public policy. Here in Britain we have not adopted subsidised finance et cetera for young farmers to the extent that it has been adopted in other member states. Is that still an area you are interested in? George Dunn: I am not sure that the retirement scheme is necessarily a good solution to help individuals to deal with price volatility. Yes, we have an issue of farmers being unable to retire because they do not have the economic wherewithal to do so, but some of the most efficient farmers I see day to day are those who are of an age when they should perhaps be handing over to young people, to give those young people the opportunity. I failed to mention in my previous answer that one area where the Government could play a major role is in their own procurement of food within the marketplace. It is only just over a year since we had the Bonfield report, which challenged the Government about public procurement on a balanced scorecard basis. If we were allowed to move that demand curve

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) to the right, we would be in a significantly more beneficial place in a volatile market, but I am not sure that the retirement scheme would necessarily be of benefit in this respect. Lynsey Martin: As I said before, we are working with CEJA to look at how young farmers are getting finance. CEJA is looking into how that could work in each of the member states. We also see it as an opportunity to look more into share farming and joint ventures, but we need support to get that off the ground. We did a lot of work with Steve Webster, with some Defra funding, to look into a matching service, which would look at matching young people to those opportunities. It is now with Fresh Start and Alison Rickett. We are still working with them to carry that forward. Matching keen young farmers with people who are looking to retire, to diversify their business or to hand over the reins, where they do not have an opportunity to hand over, would be a great opportunity for people. That could take as much support as we can get. Lord Rooker: I have a couple of follow-ups to points that you raised, George. On the point that you made about the AHDB, I have always taken the view that the money is the farmers’ money. It is the levy—it is not taxpayers’ money. I realise that it is done by statute, which is an issue, but Defra or the Government have no place interfering in that. Is it not still the case, though, that the six sectors are a majority on the board? When it was set up, there were 10, I think. The agricultural industry sectors were six, so they were always in a majority. George Dunn: What happened in the past was that individual bodies were responsible for their individual bits of the levy. They have now come together under one body. Bringing any disparate group of individuals and organisations together is always a challenge. One of the challenges that AHDB now has is to maintain the ethos of ensuring that, where levy is paid, it goes to the benefit of the sectors, while creating a better structure within which that is operating. There is a long way to go. The new chief executive and chairman are doing a good job, in my view, in trying to bring it forward. There is a lot of criticism within the industry about what it is doing and how fast it is moving. I think we have to give it one last chance so that it can get itself into a position to be more effective than it has been. Lord Rooker: My other point relates to your answers to the questions about diversification issues. I do not want to start a new hare running, but at some point we will do a report. I realise that there are some huge tenant farmers—they are not all small places—and that there is massive diversity in your membership. I think you made the point that they are not in full control on diversification, simply because, if you have a contract to be a tenant farmer,

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) it is farming that you are doing and you will not do anything else; that is the landlord. That goes against the whole point about using opportunities to improve business performance, irrespective of counteracting price volatility. Are there any recommendations that we could make that would be different for tenant farmers, as opposed to owner-occupiers, in respect of that? Is it something worth looking at? We are looking at price volatility. From the previous evidence, all of which you heard, it is quite clear that these issues are not necessarily to counteract that, but they are very useful for making better use of the land, so there is a more productive business and everybody gains. If there are barriers for tenant farmers that do not apply to owner-occupiers and that Parliament and Government should look at, I am very keen that we hear about them. George Dunn: Some time ago, we argued that there should be some form of appeal mechanism, so that the landlord could not simply say, “No”. We are not interested in allowing an unreasonable tenant to make an unreasonable case to a reasonable landlord. That is not what we are here for. In circumstances where the tenant is well-advised, has a good plan and is being reasonable and the landlord is the one who is being unreasonable and saying, “No”, there should be some expert determination or arbitration procedure that would allow the tenant to say, “Actually, I do want to carry out this activity on this ground. I think that it is a reasonable thing for me to do, so I want to find a way of resolving the dispute”. We got close to that in 2006, but there was never the political will to push it through. That is something we would certainly be interested in looking at. Viscount Hanworth: Would you say that the appeals and arbitration procedures are underdeveloped? You mentioned that it was not worth going to arbitration or making an appeal against a rent rise, because it might incur— George Dunn: I was making that reference specifically in relation to rent, because arbitration is a very expensive route to take if you want to try to review a rent. There are other mechanisms available, such as expert determination. That was one of the things that we tried to put in through the deregulation task force, in which I know Lord Curry has been involved, to try to find easier mechanisms to have those disputes resolved. Sadly, the Government implemented it in such a ham-fisted way that it is a completely unusable piece of the toolkit for a rent review. Viscount Hanworth: Would you be interested in sending us a note to expound this and to suggest how the Government should have implemented it? George Dunn: Absolutely. I would be very happy to do that.

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) Lord Curry of Kirkharle: I have two follow-up comments, George. The first is in response to Lord Rooker and the whole issue of tenant farmers being able to diversify. As you know, I had evidence on this back in 2002, when a tenant farmer on the outskirts of London, with a very small farm, was in dispute with the landlord because he wanted a farm shop and the landlord said that he could not have one. The sustainability of the whole business was absolutely at risk because of that. It would be useful, following Lord Rooker’s comment, to have some words from you about that issue. George Dunn: I am happy to provide that, Lord Curry. Lord Curry of Kirkharle: What we cannot have is tenant farmers building car parks and caravan sites across the whole place. George Dunn: Absolutely not. Lord Curry of Kirkharle: There is a balance to be struck. George Dunn: Absolutely. It is about reasonable business plans. Lord Curry of Kirkharle: Absolutely. My second comment relates to the point Viscount Hanworth followed up on. You commented that the changes to the legislation have not been helpful. I have just stood down from the Better Regulation Executive, where we were trying to be helpful in changing the wording, so it would be helpful to have your feedback on that issue, too. George Dunn: Right now or in writing? Lord Curry of Kirkharle: When you send something in. George Dunn: By all means. Q27 Lord Selkirk of Douglas: I have a question that is mainly about high technology. Do you feel sufficiently knowledgeable and confident about how to mitigate risks and take advantage of private sector partnerships, futures markets and so on? Should innovation and knowledge exchange play a large role in managing on-farm risks? George Dunn: Absolutely. Information exchange and innovation need to be part of the solution and to be accessible to the farming community. Again, there is a role for AHDB in providing some of that assistance. I go back to what I said earlier. We are expecting farmers to be experts in many fields these days. Their ability to understand financial markets and measures may not be as great as it would be if they were operating from a City desk, for example. I question the extent to which we can necessarily expect farmers to be kings of their own kingdom in relation to managing future volatility. Innovation and benchmarking discussion groups are a key part of the solution.

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) The Chairman: Are there any other questions? Q28 Lord Selkirk of Douglas: This may not be a question—it is primarily for you, George—but it could be relevant overall. It is about the extent to which land ownership has changed over the years. This may be a bigger issue in Scotland, where I come from, than in the rest of the United Kingdom. For example, we do not yet have a profile of what percentage of land in England and each part of the United Kingdom is owned by tenant farmers, what percentage is privately owned outright by small landowners, what percentage is owned by companies and institutions, and what percentage is publicly owned. In Scotland, that profile has changed very considerably over the years. It would be useful to have some sort of picture, because, with volatility in farming—I will put it as a question—it seems that those most at risk of adverse circumstances might be the small tenant farmers or small landowners. I do not know. George Dunn: Absolutely, my Lord. The Scottish situation is a volatile melting pot, as you well know, and has been for a long period of years. There is a certain sense that some of our English landlords look north of the border and worry about what might come south. I completely understand that. On your primary question, about a third of the land in England and Wales is farmed by tenants. There would be another 10 percentage points of individuals who are farming on something other than owner-occupation: for example, share farming, share partnership or grazing licences. Lynsey Martin: Lord Chairman, can I go back to Lord Selkirk’s previous point about technology? We as young farmers are keen to take up technology, whether it is in genetics, in livestock or in the arable sector. What we lack is a bit of security that goes with it. We will be approached by people to plant however many hectares of a new breed of arable crop. If that fails, we are taking the risk. For some people, that is a big stumbling block to taking up those opportunities, yet those farm-level trials are needed to make it an affordable option for everybody to use as soon as possible. Any measures to speed up the development to full market release, perhaps through some sort of insurance for farmers willing to trial those things, are always welcome. Lord Selkirk of Douglas: Are there any particular measures that you would like put in place to ensure greater resiliency? George Dunn: On the tenancy side, the biggest thing we are currently asking for is for the Government to look at the taxation environment within which landlords make decisions, to

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National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28) encourage landlords to let farms for longer lengths of term. We are seeking 10 years-plus. We need to look at how the taxation environment incentivises that. Lynsey Martin: Any encouragement that helps people to make the decision to enter new, innovative ways of farming such as share farming or joint business ventures—whatever they may be—is welcome, to help young farmers to get a foot in the door. As young farmers, we are aware that, in this climate, land ownership is not a prospect that many of them can take up, so we are looking into share farming, renting, innovative new methods and joint business ventures as our primary ways of getting people into the industry. We need to make sure that we are shouting about the ones that are working, and developing those where we can. The Chairman: Thank you very much for coming. I am sorry that we have to bring it to a close now, but we are grateful to you for giving evidence on behalf of two very important elements of the farming community. I wish you, and, indeed, members of the Committee, as this is the end of our business, a very happy Christmas and a prosperous new year. I remind members that our next meeting is on 13 January, following the recess.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63)

New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63)

WEDNESDAY 27 JANUARY 2016 11 am Witnesses: His Excellency the Rt Hon Sir Lockwood Smith and Dr Jared Greenville

Members present Baroness Scott of Needham Market (Chairman) Lord Boswell of Aynho Lord Bowness Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Krebs Lord Rooker Lord Selkirk of Douglas Baroness Sheehan Lord Trees Viscount Ullswater Baroness Wilcox ________________ Examination of Witnesses His Excellency the Rt Hon Sir Lockwood Smith, High Commissioner of New Zealand to the United Kingdom, and Dr Jared Greenville, Senior Agriculture Policy Analyst, OECD

Q52 The Chairman: Good morning. On behalf of the Committee, I welcome Sir Lockwood Smith, High Commissioner of New Zealand to the United Kingdom, and Jared Greenville Snr, agricultural policy analyst from the OECD. You have come from Paris today, so we are grateful to both of you for giving up time in what I know are busy schedules to come and give evidence to the Committee this morning. As you know, we are carrying out an inquiry into the impacts of price volatility in agriculture on farmers and on farming. Having spent quite a lot of time looking at the UK and then, last week, talking to the Commission,

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) today’s focus is really on the international situation. Your evidence from the different perspectives will be really useful to us. This is a formal evidence-taking session of our Committee. A full note will be taken, put on the public record in printed form and on the parliamentary website. We will send you a copy of the transcript and you can revise any minor errors. We are being webcast live and that will be available on the parliamentary website. You will have received a list of the interests declared by Members. I remind my colleagues to declare any relevant interests on the first occasion they speak in this session. With that, I will kick off with the first introductory question—but perhaps before you answer it you might want to say one or two words about yourselves and particularly your involvement with this topic. How do you see recent trends in agricultural price volatility? Do you think that the situation is worsening, or are its impacts worsening? It is not quite the same thing. You can just give us a general overview on that. Sir Lockwood Smith: Lord Chairman, thank you for this opportunity to be with you today. It is a real tribute. I have spent many years on that side of the table in New Zealand politics and it is interesting to be on this side. My background in agriculture is pretty simple: I am a farmer. I still farm; I farm a 900-acre beef property, running about 700 head of cattle from here in London. The farm is in New Zealand, of course. I grew up on a farm. I was an agricultural scientist for a while, then I went into international marketing; I used to manage the New Zealand Dairy Board’s marketing business across southern and eastern Asia. From there, I went into politics and into Parliament in 1984, the year before all subsidies were eliminated from agriculture in New Zealand. I then became Minister of Agriculture in New Zealand for a time and then Minister for International Trade, and I was heavily involved in a number of global trade initiatives. Finally, I was Speaker of the Parliament before coming here to the UK three years ago. In response to your first question, price volatility is obviously a concern to everyone in agriculture when it becomes extreme, and at the moment we are seeing extreme price volatility in some sectors—not in all sectors, but in some, notably from the New Zealand perspective the dairy sector, which at the moment is experiencing extreme price volatility. There are a number of reasons for that that are pretty obvious. One factor that you have in agriculture is that such a small portion of overall production is traded freely. So when you get shifts in supply in supply and demand, the impact is exacerbated in the area that is traded freely.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) I will give you a little example of what I mean by that. New Zealand produces only 2% of global dairy products, yet we control over one-third of what is traded freely between countries. We produce 6% of the world’s sheep meat, yet control more than half of global inter-country trade in sheep meat. So the amount of total production that is traded freely is very tiny. When you get shifts in supply and demand, especially a fall-off in demand, or just small increases in supply, they tend to have their impact in that traded sector. So the impact on price volatility is huge. At the moment, of course, there is China, having reduced its demand for dairy products—we believe temporarily—and the Russian import ban on dairy products, along with the removal of quota constraints across the EU, seeing some increase in production across the EU. The US had a very good production year in dairy products last year; New Zealand had a good production year last year. So the impact on prices is quite extreme because of those quite small shifts in supply and demand in the tradable sector then spilling over into the non-traded sector. The single greatest thing that could be done globally to reduce volatility in agricultural products is to open up markets, because markets operating freely will never have that kind of volatility. The Chairman: That is an interesting point, which I do not think we have heard before. Dr Greenville? Dr Jared Greenville: Just as background for myself, I am an Australian originally—so you have an antipodean link here—but I work at the OECD at the moment. I have worked at the OECD for a few years. My main role there is to lead a lot of the work that we do on agriculture trade policy, which includes things to do with the WTO and global value chains. I also look at a lot of work relating to food security in agricultural markets and how those markets influence outcomes and things like that, particularly for some of our developing non-members of the OECD. So price volatility and so forth links to that. I echo some of the comments that were just made, but when we are thinking about price volatility it is worth thinking about world versus domestic markets. Then, also, you think long term and short term. We are seeing these claims of increasing food and agricultural price volatility, but the long-term trend in world markets is of declining volatility in most products. Most products internationally traded have gradually become less volatile over time. There are exceptions, of course—there are exceptions in time, such as during the 1970s and during the last part of the 2000s—but the general pattern towards a lower volatility outlook in world markets seems to have persisted over a fairly long history. There are some good reasons for that, and they relate back to movements that have been made to

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) free up world markets and trade. As Sir Lockwood just mentioned, part of the reason why you would expect a degree of volatility, or a higher degree of volatility, in world markets is because this is a residual product. It is traded as the excessive supplies and demands from individual countries, so in that way it can be more influenced by smaller shocks. But as trade liberalisation has created freer world markets, agricultural products have started to become more pervasive, and we have seen increasing trading volumes and an increase in the diversity of supplies and sellers, which has helped to place a downward pressure on volatility. It allows international markets to start to play a bit of a hedge role. We can contrast that with domestic markets, which are generally much more open and susceptible to localised shocks, be it climate shocks, droughts in Australia, or floods or adverse weather events—yield shocks, and so forth. Those markets are often susceptible to the general variation that we get in seasonal patterns and other things, which have a certain price volatility component to them, but that can be effectively hedged against in some ways by international markets. I guess when we move on to thinking about some of the impacts, we also need to remember that some level of price volatility is necessary. There is some normal price volatility that producers should be facing as part of their normal business risks that they undertake. An agricultural business, just like any other business or sector of economy, needs to have some signal of risk to make appropriate investments into that sector. Without some level of volatility, it is hard to know what level of investment should be made in agriculture versus other areas of the economy, and a world without any risk would see production decisions that are independent of the realities of supply and demand, or just the nature of the returns that are possible from the industry. A certain amount of risk should be present in the industry, so when we think about price volatility we should really only be thinking in terms of where Governments start to think to play a role in helping to overcome these catastrophic and extreme events. I mean those one-off events and rare events that can push otherwise profitable producers, who undertake all the necessary business-as-usual risk management strategies, into a situation where they might exit, which might lead to some longer-term costs that we do not want to bear. The question is whether the impacts of those are starting to increase or become more frequent. At this point in time, the evidence is not there to say that those events are becoming more frequent, but there is an open question as to how things will look as the world progresses, with the climate influencing more production and also influencing comparative advantages in producing regions. In any

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) kind of thinking about where Governments should play a role in relation to these catastrophic risks, it cannot just be backwards-focused; it needs also to be forward-focused. The Chairman: Okay. That is a really thoughtful and helpful introduction to this morning’s session. Q53 Lord Trees: Good morning. I am going to ask you about the tools for managing risk. We have been struck in recent weeks from different evidence that we have had about the difference in the tools in the toolkit between Europe and America in particular. In the EU, the CAP budget is devoted to insurance and 60% to direct farm payments, which is obviously a major buffer against volatility, whereas in the US it is almost the reverse. In New Zealand, of course, you removed all subsidies. What is your opinion of the main policy instruments and public funding available to deal with price volatility or to mitigate it? What is the effectiveness of each of those? Sir Lockwood Smith: We have not colluded in our responses—I have never met Jared before—but it is interesting. We must not lose sight of what Jared has just said to us about the value of natural volatility in ensuring that we get ongoing innovation and productivity improvements in agriculture. It is crucial that farms as businesses need to make volatility their friend, because during difficult times you get the innovation that leads to greater productivity. I can share with you that the productivity improvements since the subsidies were removed in New Zealand are just staggering. To come back to your principal question about support mechanisms, in New Zealand our overall subsidy level remains just under 1% on the OECD producer subsidy equivalent system. The Government fund some research, but do not directly fund any support payments to in any way reduce volatility of prices. They do, however, have quite a useful scheme involving the Inland Revenue department. In New Zealand, farmers in years of high income can deposit income with the inland revenue—they get 3% interest on that at the moment—and they have to withdraw it again within five years, but they can withdraw it in a financial year of low income and perhaps not have to pay tax on it. If they withdraw it in a year when they have made a loss, they could withdraw the amount that brings them up to breaking even and pay no tax on that money. That is quite a useful mechanism for farmers in an industry where profitability moves about rather more than in some other businesses. The Government are not subsidising it, but they pay interest on the money when it is deposited with them and farmers have to pay tax on it if they make a profit in the short to medium term. That does help with coping with volatility. I even used it as a farmer once myself, in the past 30 years when I have been running my farm.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) Lord Curry of Kirkharle: Do you have price averaging over a period of time? We have recently introduced five-year price averaging here for farmers. Does that link to that at all? Sir Lockwood Smith: Not at all, no. In New Zealand, there is no price averaging. Lord Curry of Kirkharle: Sorry, I meant tax averaging. Sir Lockwood Smith: The only mechanism is the mechanism to spread your income— otherwise, like any business, you pay tax on your profit. You pay provisional tax, so at the end of the year you might not have a huge tax bill, and you may actually get a tax refund if you have paid too much provisional tax. But I used to be revenue spokesperson and a deputy Finance Minister, and I cannot think of any tax averaging mechanism that we have. It is that spreading of your income that is allowed for farmers; by and large, it is a privilege that farmers do get, which recognises the fact that income can swing around a fair bit year to year. Q54 Baroness Sheehan: You have talked about volatility driving innovation. Can you cite one or two examples of that? Sir Lockwood Smith: Maybe I could share with you where support reduction and therefore short-term dropping of prices has led to innovation. I can give you two quick examples. New Zealand’s wine industry is a classic example. By the mid-1980s, it had a wine industry in crisis. We had a wine lake, which was protected by a 40% tariff; you could not export the stuff—it was battery acid. Thirty years later, wine is now New Zealand’s second biggest export to the UK and the whole of the EU and our biggest export to the Republic of Ireland and our third biggest export to Australia. We command the highest average price here in the UK. Why? Because of innovation. Once the protection around the industry was removed, the New Zealand wine industry led the world in canopy management, in stainless steel fermentation and in screw caps on bottles. Now we command a higher average price in the UK market than does France. Another classic example would be the New Zealand sheep industry. The producer support equivalent subsidy for sheep meat in the mid-1980s or early 1980s got up to 90% of the value of the product produced. Farmers farmed for subsidies. Since that subsidy was removed in one year, in 1985, the productivity improvement in the sheep industry has been staggering. Sheep numbers dropped from 70 million now to under 30 million, and we produce the same amount of lamb from fewer than 30 million sheep that we used to produce from 70 million. That is the productivity improvement that has happened since farmers and wine producers had to face the realities of the market place.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) Viscount Hanworth: With respect, you have not given us an idea of the causal link. These are correlations, but how has it happened? Maybe I am being a bit obtuse but, short of shaking inefficient producers out of the industry I cannot see how volatility is going to advance productivity. Sir Lockwood Smith: What is fascinating about it as a business person is how you can improve your productivity, when you are looking down the plughole and facing the realities of going out of business. That is why private business and capitalism works—that when you face the realities of going out of business it is extraordinary the lengths that the private operator will go to to improve their efficiency to survive. Right at the moment, given the low dairy prices, DairyNZ, an organisation funded by dairy farmers, is working with dairy farmers on how they can squeeze more efficiency out of their farming operations. That is a project going on right now. Viscount Hanworth: So it is the stringency of their circumstances that leads them to find any recourse that will rescue them. Sir Lockwood Smith: That is what drives it. It is simply the normal action of business that, when you face the prospect of going out of business, you make operation more efficient, and it is extraordinary how farmers in New Zealand have made their operations more efficient. Some went out of business. We had 80,000 farmers in New Zealand in the early 1980s, and 1% of them went out of business when the subsidies were wiped in 1985. The Government helped with one-off exit packages and some financial advice to farmers to help to sort out whether they had a viable future. So we lost 800 out of 80,000. Q55 The Chairman: We will come back to you shortly on the global perspective, but let us just stick with New Zealand for a bit. What measures were the Government able to take to help farmers during the period of transition? If they had no capital to invest in some of these more efficient ways, or they did not have the knowledge base because the skills transfers are poor, was there a role for the New Zealand Government in that transition? Sir Lockwood Smith: The Government did indeed help a little—I stress “a little”—back there in 1985. I had just entered Parliament and I was farming at the time. When they wiped the subsidies, there was the biggest protest I have ever seen outside the New Zealand parliament; there were farmers for miles. The Government provided some assistance, in an exit package, a one-off package amounting in total value to around two-thirds of the farmers’ income in the years preceding their exit. They provided a bit of money to set up an advisory trust to help to advise farmers on the exact details. The advisory trust provided financial

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) advice to farmers on whether they should leave the land or stay in business. The trust employed eight advisers nationwide, so it was not a huge operation. Some farmers were financed through a bank called the Rural Bank, which was government-owned, and through that bank the Government provided assistance with mortgage repayments and that kind of thing. I could not tell you the proportion of farmers who were funded through the Rural Bank—I certainly was not—and the bank was sold not long after that. The Government provided subsidies for a very brief period of time to assist with the sale of the bank, I guess, because some of the loans would have been very poorly performing. There was that short period of transitional assistance and one-off exit packages to help farmers. As I say, we lost 800 out of 80,000, which was probably far less than most people projected. The advisory trust with eight advisers was set up nationwide to advise farmers whether to stay with it, and those financed through the Rural Bank got some help with mortgage repayments. But of course the private sector provided help, too, because banks naturally had significant exposure to farming in New Zealand, so they worked with their clients. This is what happens today in New Zealand: everything is conducted on a normal business basis. Banks during this downturn now are working with their dairy farmer clients to look at whether they defer payments for a period of time and whether a client is financially viable in the medium term. The normal bank-client interaction went on back then and still goes on today. The Chairman: Lord Trees, did you want to come back on New Zealand? Lord Trees: Yes, it was just on the socioeconomic impact. You said as a throwaway line, “We lost a few farmers”. In Britain and certainly in continental Europe, the socioeconomic upheaval would be far more. You said that you lost 800 out of 80,000 farmers; we have already lost far more dairy farmers as a proportion of the total. But I think you have answered the questions about intervention in terms of mitigating a transition; that is one of the things that concerns everybody in Europe. We can make farms more efficient, which would mean fewer farms, but we have all these people in the rural economy, and what are we going to do about that? Sir Lockwood Smith: In New Zealand, we did not have a lot of choice, because farming is now about 6% of our GDP; it has gone up slightly, because it was about 5% of our GDP previously. The agricultural industry at large represents about 20% of our GDP, when you include manufacturing, and it is about 60% of our export income. Politicians in New Zealand cannot think of farming as something to be treated as something that it is nice to look after; it is a fundamental part of our economy. New Zealand’s economic success, which has been

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) quite staggering since the mid-1980s, has largely been a result of looking at all sectors of the economy through that lens and seeing that they matter to the economy and the well-being of all New Zealanders. When I was addressing the WTO as Trade Minister, I did an estimate of what the CAP cost Europe and lost well-being across Europe, and the figure I came up with was quite a significant cost in loss of overall GDP growth. As Jared mentioned, it is about the misdirection of investment and having businesses focused on where they can get more government support rather than on how they could operate more effectively in the marketplace. The change that happens is quite staggering when businesses focus on the market and on how to get maximum value out of it, instead of focusing on the Government and where they can get more support out of the Government. That is ultimately a dead-end route. The Chairman: We have one final question for the High Commissioner before we bring Dr Greenville in. Q56 Lord Rooker: I have a minor declaration. On my second and last private visit to New Zealand in 2010 with my partner, we married in Christchurch. Sir Lockwood Smith: I am pleased that the building was still standing. Lord Rooker: I do not think the registry office is still standing. On what you have said, bearing in mind some of the evidence that we have had previously, can you confirm that New Zealand did not give general subsidies to the banking sector to facilitate the change and the abolition of subsidies? Sir Lockwood Smith: Correct. Lord Rooker: It was quite specific in how you modelled it. How much notice was given, in terms of debate, before the change in 1985? Sir Lockwood Smith: I think not one day. I was in Parliament at the time and I remember the budget well. I think that the first that the farmers were aware of it was when the budget happened. These days New Zealand Governments tend to try to make sure that budgets are part of ongoing business; they try to pre-release a lot of information that will be in the budget, so that markets do not respond. Back in those days, New Zealand’s markets were cast in iron; they did not exist, really—or the foreign exchange market did not exist properly. There were price controls and wage freezes and all sorts of crazy things back in New Zealand in the early 1980s. I remember that there was no warning—it was just boompf. There were dozens and dozens of support systems, be it from the direct subsidy payments

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) and supplementary minimum payments, through fertiliser subsidies to incentives to develop land—you name it, there must have been 30 or 40 different subsidies just wiped. Lord Rooker: In terms of food and animal production, did the subsidies cover the range? Obviously, in Europe, it was sheep and cattle but not pigs. Sir Lockwood Smith: The subsidies varied very significantly. It is fascinating. It was mainly livestock, but not exclusively; the subsidies were for crops in general terms, but the supplementary minimum payments were for beef and dairy. The producers’ subsidy equivalents in beef and dairy were of the order of 19%—probably, in round figures, about 20%. For lamb or sheep meat the producer subsidy equivalent was 90%. That is why we got that huge increase in the number of sheep, because farmers did very well out of farming more sheep, but the damage to our environment was very significant. Hill country was brought into farming sheep that should never have been used for sheep farming, and the erosion that followed was dreadful. What is fascinating is that in the sector with the highest subsidy—90% in the sheep meat industry—subsequently the productivity has been the highest. Compared to dairy and beef, the productivity improvement in the sheep industry has been about 100% since the subsidies were wiped, whereas in the dairy industry, productivity growth has been 30% to 40% and in the beef industry it has been no more than 10%. There are interesting reasons for that, but those at the highest level of subsidy when the subsidies were wiped saw the greatest level of productivity improvement. Lord Curry of Kirkharle: But did it not coincide with a switch from wool to meat significantly at that time? Sir Lockwood Smith: I suppose, Lord Curry, that wool markets had been in decline for some time, so farmers tended to respond to that to some extent. They changed the genetic make-up of our ewe flock in New Zealand to bring in more fertile breeds, such as the Finnish Landrace, introducing them into our basic Romney ewe flock. As a consequence, lamb production tended to dominate far more than wool production. It is interesting that now wool is our fourth biggest export to the UK, and wine exports earn New Zealand 50% more than wool exports. It is fascinating how producers respond to the global market. The Chairman: The rest of the world! Dr Jared Greenville: Obviously, across the OECD there is a diverse range of countries. Europe is a member, and there are many other countries. So there is a wide range of different policies in use, and again there is a differential that you can make in terms of what policies Governments can have and what policies producers can take advantage of so that

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) Governments will enact or enable them. There are a certain amount of things that Governments can do that relate to world markets and to providing better information for producers and for government policy-makers, so that they do not just react. A lot of the problems that we saw with the price volatility spikes in the late 2000s were significantly driven by government policy decisions, putting in place export restrictions and altering input tariffs. All those things compounded movements that were occurring in supply and demand in those markets. We saw spikes. At one extreme, the rice market had no fundamental changes that suggested that prices would go up, and prices spiked really quite steeply, which had large global effects on welfare, on producers and consumers. That was all pretty much driven by government policy and export restrictions. One of the biggest things that Governments can do is to contribute to better information about stocks and policy decisions. The OECD with the G20 and the FAO is in a process of putting together an early warning system to put in place projections of where they think prices and world markets will go, how policy changes are evolving and how the outlook with stocks and so on will progress. That is a key policy avenue that Governments should continue to look at to ensure better information so that producers can get a better handle on what prices will be like next year, or a year or so after, when they will be making production decisions, so they are not caught out by sudden movements. They are more aware of these normal business risks. The other role for government is enabling marketable risks to find the market, so they are enabling those kinds of markets to work. In some countries, there are private, nongovernment-sponsored insurance markets, in which certain types of risks can be insured against. The role of government there is to make sure that those markets do not fail and that the regulations and prudential requirements are in place so those markets can evolve. It is similar for futures markets, although they not used extensively by producers, or at least not by the majority of producers. But again they help with providing that information about expectations as to where prices might go in future and about decisions made on farms about when or what to plant, when to sell or hold, and those types of things. Again, touching on some of the regions, it is about having better trade policies. Going back to my opening statement, a large benefit could be had by having freer agricultural markets to reduce price volatility and its effects—or unnecessary and excessive, catastrophic price volatility. To touch back on some of the more domestic instruments that can be used by producers, there was a discussion about tax averaging and preferential savings schemes. I

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) can give a couple of examples from Australia, which has both those things. There is a fiveyear income tax averaging arrangement, which is valuable to producers. There is also a system called farm management deposits, which is used more frequently than income tax averaging. Essentially, it allows producers, when they have a good year and a high return, to put that money into a savings account held by a private financial institution, but it is not counted as tax. So when they draw that down over a period, they can use it and it becomes part of their income, which helps to smooth the regular ups and downs that you get when you have price changes. It is not only about prices, although price is one risk that they are managing. Producers are also managing a whole range of other risks, such as weather-related risks and demand risks. Prices should be considered only part of the bundle of risks that producers face. Farm management deposits seem to be used in Australia for that risk management, particularly for drought, because droughts occur. To some extent, they are predictable, but they have quite significant effects on production. The other advantage of that kind of scheme is that when it is in place you may have other arrangements, such as a tax system allowing for excessive or accelerated depreciation of capital goods. Sometimes when you have a good year, your incentive rather than to save and smooth your income is to invest into capital, because you get that accelerated depreciation and do not face a tax. That does not help in managing price risks necessarily, unless it is an investment driven by a move to a new production system or something that allows you to cope and mitigate those risks on the farm through changes in practices. But at least if you have both you have a complementary system. One way you can look to manage risks holistically, through income transfers through time, and in another way you can look at an incentive to adopt new practices and technology. Something that may come up in more detail later is the safety net, and income support that farmers receive. For whatever reason, a decoupled income stream that comes from a source outside agriculture will act as a risk management device for the household. That does not necessarily mean that it needs to come from the Government; part of the risk management strategy for a producer or a household, if they are in a farming household, in a highly variable income situation, would be to look for alternative sources of income. I guess this, again, comes back to the initial points that I made about trying to differentiate between what Governments should think about doing and the policies that they should think about offering, from those that help to manage the extreme, more catastrophic risks to those that

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) are just about managing business risk. Those business risks are best managed by the producers themselves, rather than Governments. The Chairman: I will take two questions, from Lord Cunningham and Viscount Hanworth and then move on. Q57 Lord Cunningham of Felling: Both of you have suggested that one of the best ways forward would be to open up markets to have better trade policies and fewer obstacles to more open trading. First, is that the committed policy position of the OECD? Dr Jared Greenville: I would say that it was an evidence-based position. We are recently doing some work to look at the new platform. Lord Cunningham of Felling: Please say yes or no. Dr Jared Greenville: Yes, in the sense that it is evidence-based. We only ever come up with a set of policy recommendations. Lord Cunningham of Felling: I understand that it is New Zealand policy, of course—they invented it, almost. The Chairman: I think that Dr Greenville is making a fair point in that it is not an organisation that makes policy from an ideological perspective. Lord Cunningham of Felling: Let us assume then—I do not want to put words into mouths—that more open markets and freer trade would be one of the biggest ways in which to reduce risk in agriculture. Would you say that was so? Sir Lockwood Smith: I would like to pick up on what Jared said. I was actively involved in marketing dairy produce back in the days when subsidies were more prolific across the globe. What Jared has said about the impact that that used to have on price spiking is so true. I remember when every day in my work we would look at what the EU restitution level was, because whatever it changed the restitution level to meant that global dairy prices would spike up or down. We have made progress now. Under the common agricultural policy there are fewer production-linked payments; decoupling of payments from production has been a major step forward. What is more, at a global level just recently at the 10th ministerial conference of the WTO in Nairobi, the WTO agreed to the abolition of export subsidies. That will be significant because, as Jared also mentioned, during the latter part of the first decade of this century, when the global financial crisis hit, some countries started to use things like food aid, a subsidy that purchased excessive supply from their farmers at often inflated prices and then put it into other markets, supplanting other products and suppressing prices. That will now all be banned by the WTO’s decision. So we are already

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) seeing things happen and progress being made: the decoupling of subsidies from production and the removal of constraints over quotas in the EU as well as the WTO’s decision to abolish export subsidies. All those things, even the Uruguay round and the progress made there, have helped to lead to normal market mechanisms having greater impact on stabilising prices. Lord Cunningham of Felling: How would that affect the operation of the common agricultural policy, if all that progress goes smoothly forward? I know that it will not all go smoothly forward, but let us say that it goes forward. Where would that leave the CAP? Sir Lockwood Smith: I have to be very careful here, because decisions on the common agricultural policy are nothing to do with me. I would observe that change is inevitable, partly for social reasons. I do not think that young businesspeople are going to want to live their lives whereby their business future depends on politicians. I would think in this day and age that for young people—certainly young farmers in New Zealand—that would be the last thing that they would ever want to happen. I think we will start to see people moving away from the kind of farming where decisions are made by politicians. I had better not tell you this story— The Chairman: We probably need to move on anyway, because we still have a lot to get through, and we have already had 40 minutes. Could this be really brief, please? Q58 Viscount Hanworth: Are the income transfer schemes universal in Australia and New Zealand? Dr Jared Greenville: With the income transfer schemes, the access to farm management deposits and income tax averaging, the condition is that you basically just need to be a farmer. Viscount Hanworth: Is the participation universal? Dr Jared Greenville: No, not everyone participates. Viscount Hanworth: In New Zealand, is it the same? Sir Lockwood Smith: We have a very similar scheme called income equalisation. The only difference is that the money is deposited with the Inland Revenue department. I could not tell you how many farmers use it, but we could probably get that information. Viscount Hanworth: I would like to know, as it is crucial to assessing the impact and importance of that scheme. The Chairman: I would like to move us on to insurance, please.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) Q59 Viscount Ullswater: We have heard a lot of evidence that in the USA and Canada insurance is a big thing in the agricultural market, but I have not heard you mention it for New Zealand. Does it exist in New Zealand? Do you have a futures market in milk, for instance? How would an insurance scheme work, if you had one? Would it be publicly or privately funded? You have talked a little about the intervention of banks when you had that big change, but perhaps you would like to explain a little bit about insurance and whether it exists. Sir Lockwood Smith: Certainly, were such a thing to develop, I would be pretty certain that the Government would not be funding it—absolutely not. I am not aware of widespread insurance schemes in New Zealand in terms of trying to insure price stability. But what we do see is the development of a futures market, particularly in the dairy sector, run by the New Zealand stock exchange and participated in by processing companies and, probably, larger farming operations. More corporate farmers would use it, and it is not used so much by smaller farmers. However, a lot of processing companies offer longer-term contracts that smaller farmers could enter into at the start of a season. Of course, in the dairy industry they have that kind of contracting arrangement, and farmers contract with the dairy company for a supply season, so they have a reasonable guide as to what the pay-out will be from the dairy companies. In the meat industry, most meat companies offer forward contracts, though not all, and farmers can forward-contract at a known quantity and price and forward-contract a portion of what they know their product will be for that year. I am not aware of insurance schemes, as such. However, as Jared said, I think we will see the futures market develop a little more, because it is a useful indicator of where prices are going. Viscount Ullswater: What about drought insurance in Australia, and catastrophe insurance in general? Dr Jared Greenville: The general term is multi-peril insurance, to do with a range of different risks—price, drought, weather, and catastrophic events generally. There are some—but very limited—products on the market in Australia for multi-peril crop insurance for producers, but it is a fairly new market. Viscount Ullswater: But it is run by the insurance industry. Dr Jared Greenville: It is run purely privately. The Australian Government released an agricultural competitiveness White Paper at the end of last year which talks a little bit about insurance and insurance policy. There is some thought about looking to overcome some of

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) the market problems by informing farmers as opposed to intervening and subsidising premiums and the like. So it is about that information discovery. The main reason why these markets do not exist is often because of the high costs of transacting. You cannot tell your good risks from your bad, and you cannot tell what people will do after they get it. Will they abandon all their own risk management strategies that they have in place and just make themselves susceptible? So there are a lot of issues—and Governments cannot necessarily do better, for the same reasons that these markets do not exist. Simply providing the subsidy for an insurance premium does not overcome the reason why the market is not there. You are not necessarily going to get the outcomes that you want just by providing that subsidy, so care needs to be taken with the design of any scheme. There is a real risk that, with poorly designed schemes, workers just count on cyclical payments, which means that you get production that does not respond to changes in prices and events. You could run into environmental problems by encouraging people to hold stock and just continue practices when it is not necessarily a good idea to do so. Sir Lockwood Smith: The New Zealand Government do provide a scheme for extreme environmental circumstances, such as extreme droughts and natural disasters. At the end of the day, in terms of income support, when there is an area declared like that, a family in a farming operation can receive working family tax credits as normal employees would have available to them but business people do not normally have available to them. That is made available to families in an extreme event, when the Government declare an area or a region as an extreme event. There are some low-level assistance measures available there. Viscount Ullswater: But that is a government decision rather than a business decision by the farmer. Sir Lockwood Smith: Yes, that is a government decision, in recognising that a serious drought has affected an area, for example. Almost every year now there might be one area in New Zealand where such a declaration is made. The Chairman: I want to move us on now to research and innovation. Q60 Lord Curry of Kirkharle: Both New Zealand and Australia have great reputations for the quality of their science and the investment in agricultural science. Having been to some of your institutes, we are very impressed by the commitment to research. I am interested in the extent to which Governments are committed to this and whether you believe that this is a contributory factor in mitigating global price volatility. There is the development of new tools and new scientific knowledge. I would also like to know whether,

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) in the case of New Zealand, the removal of subsidies coincided with an increase in government commitment to the funding of science, and whether there is any role in government in translating that research knowledge. One big criticism that we get here is about the gap between research funding and the translation of that research knowledge into practical solutions. The Chairman: Perhaps we can start with Dr Greenville on that one, in the generality. We are running perilously late now. Dr Jared Greenville: I shall be quick. Markets are becoming more complex, as is production. Research and development and, importantly, the matched extension of training and advice is a critical tool to help producers start to develop those on-farm production and risk management techniques. So there is a clear link between R&D extension and risk management—I think that goes without saying. There has been a general shift towards decreasing funding in all these areas. The public sector remains the major funder, although there is a whole range of different models. You mention that Australia and New Zealand have a certain type of model, which is true; they have a model that is much more matched to co-funding. The advantage of those systems is that you can ensure that whatever research and development funding is spent is directed towards the projects that the industry wants and needs. So these co-funding arrangements and the more co-operative research structure have proved beneficial for those type of outcomes. Across OECD countries, there is always a clear role for government to provide some level of extension advisory service, particularly related to those of a more public good nature—new technologies and so forth. When you think about those that are driven towards more sustainable productivity development, which is also an important longer-term risk management strategy, there is a clear role for government, because the private sector is unlikely to play a role. There is a continuum there. It is about trying to exploit the best of both worlds—get the best out of the private sector contribution, where competitive funding models, and so forth, have been used, as well as then making the most of your government spend. Sir Lockwood Smith: In New Zealand, when the subsidies were eliminated in the mid1980s, the funding for the advisory service was also wiped. The Government probably spend less now on direct funding to AgResearch in New Zealand than they used to, but in order to make sure that funding goes where the greatest benefits will come, the Government’s primary growth partnership involves a 50:50 sharing of costs with a whole range of people interested in research across the agricultural sector—so the Government pay 50% and

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) private sector pays 50%. The Government have now put several hundred million dollars into that. I recently gave a paper to the British Society of Animal Science on the link between science and policy uptake; you mentioned that that is a disturbing problem. I did a full analysis of the history of New Zealand’s agriculture from its start in the 1880s. What was so compelling about that was the period where there was the least uptake of science and technology. I broke New Zealand’s history into four periods: the early phase up to the Second World War, post-Second World War to the UK/Britain joining the EEC, the period of subsidies from 1973 to 1985, and the post-subsidy period. The period with the least uptake of science and technology was the period of maximum subsidy from the Government. That was so compelling; it just killed the uptake of science and technology. The Chairman: Is there any evidence of that phenomenon elsewhere? I suppose you took the dramatic step of creating a benchmark by sudden withdrawal. Is it difficult to make those comparisons elsewhere? Dr Jared Greenville: Yes, it is difficult to make those comparisons without the link between the uptake of R&D, innovation and subsidies, but we generally see that productivity levels and productivity growth are slower in economies where subsidies and government protection are higher, because there is just not the business need to adapt. There is also a mix of the overuse of certain imports or shifting and shaping to areas that you would not otherwise want. The Chairman: That is helpful. We are moving into the area that you wanted to explore, Baroness Sheehan. Q61 Baroness Sheehan: Yes, on knowledge, sharing and information. I will quickly quote what the National Farmers’ Union told us a few weeks ago: “Successful modern farming is a skilled operation that requires technical proficiency, business acumen and environmental awareness”. Without wishing to put words in your mouth, I think I heard you say something similar at the start of the meeting. Could you just explain what publicly funded knowledge transfer and training is available to farmers in your country? Do young farmers and/or tenant farmers have specific skill requirements to protect themselves from the effects of price volatility and to cope with the technological and commercial challenges of modern agriculture? Dr Jared Greenville: I will start from the OECD’s perspective. I can provide more detailed information afterwards. We have a little table—I have it in front of me—on different systems

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) and which countries make use of different systems, which might be of use to the Committee. Again, the range is diverse. Some are purely state-funded, some are a public/private partnership, and some are purely private in the way they go about their extension. Specifically on risk management, price volatility and so forth, there is not only a need for R&D, new production techniques and so forth—that level and type of risk management; there is also the financial side: how to manage a business, how to do budgets and forecast for risk, how to understand and transpose price margins and what it might mean. That side of the extension does not seem to be all that common across countries in the OECD. Going back again to Australia—I am sorry, but I guess it is closer to home—there is the Rural Financial Counselling Service, which is in place to advise on this part of the business, so that they can hopefully better manage risks and so forth. That is all publicly funded. It could be tied to be the use of other financial instruments, such as the tax instruments, farm management deposits, and so forth. So there is always a range. Farming is a business in which you need skills and knowledge—not just young but existing farmers—but what young farmers would be particularly vulnerable to are the shocks where they do not have the financial reserves to deal with it. They are more vulnerable to exit if they enter at the wrong time and there is a sudden shock, and so forth. In that sense, there is potentially a role for more ex ante type information provision to see what is expected, so that they go in with their eyes wide open. Sir Lockwood Smith: New Zealand has a very good system of primary or fundamental training in agriculture, which started many years ago. New Zealand had nothing indigenous about farming, in that all our pasture species and animals are exogenous to New Zealand. So the Government put normal amounts of money into opportunities for young people to study agricultural science at university level and polytechnic level, with more applied learning—and then at farm training system level. We have a number of training farms across New Zealand, where young people can get government support to pursue their learning about the farming industry. They are very good. But beyond that, it is up to the farming sector and the agricultural industry itself to organise its distribution of information, and they do have that— farmers fund DairyNZ as well as Beef + Lamb New Zealand and Federated Farmers. They are all involved in the extension of the latest research information from around the country and around the world. Farmers naturally look towards that, because they know that they need the latest information to manage their businesses. So it is a sort of two-way process.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) The more that Governments get involved in providing these things free, the less valued they are. The Chairman: I want to finish this session with one final set of questions, which Lord Krebs will lead on. This is really asking you to put your necks on the line and offer an external perspective on what the EU should do next. Q62 Lord Krebs: Thank you, Chairman. I think, Sir Lockwood, you have already mentioned a couple of things that happened in the CAP—the decoupling of subsidies from production and the removal of quotas, which you thought had helped in reducing price volatility. Could you offer us your views on what further measures might be taken to reduce price volatility after 2020, when the CAP is further revised. Do you think that insurance could play a role? Do you think that there are lessons that we can learn from other countries and the financial instruments that are deployed in your country and elsewhere? Sir Lockwood Smith: One has to be very careful in suggesting what our respected friends in your country and the EU should do; it is your business. All I would tend to say is that, as you have heard Jared mention, Governments trying to organise insurance schemes to reduce price volatility are challenged because they are no better than anyone else at assessing risk, and it is so difficult to assess risk, as Jared said, in our primary industries. I suspect that created insurance programmes will have problems, otherwise they would have been developed long ago. To me the greatest thing that could be done in the EU is to carry on with what is already happening—opening markets progressively and looking outwardly. The reason why New Zealand can withstand price volatility is that we are so outwardly focused and we operate in so many diversified markets. New Zealand is marketing primary produce in more than 100 markets globally, and when one goes up another goes down. So the greatest thing that the EU could do to maximise global well-being in food security and agriculture would be to keep progressively opening up agriculture, as with any normal business, because markets are remarkably effective at delivering when we politicians—I am thinking of my former career—cannot actually do that sort of thing. My advice would be to carry on with what has been started, looking towards becoming more outwardly focused, more than so internally focused. I was the keynote speaker at the National Farmers’ Union conference a couple of years ago, and they were bemoaning the control that supermarkets have over them. I said that one of the problems was that they were so internally focused; once they are involved much more in international markets, supermarket chains cannot dictate the price any more.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) Dr Jared Greenville: I will disappoint slightly and sit on the fence for a little bit, because we are currently doing a review of the recent CAP reforms, which we will put out towards the end of this year. It will have some recommendations as to where we think future reforms are going. I have a couple of points—and some of it is food for thought. Definitely, we would advise continuing on this path towards decoupling; that is an important part of the future CAP. It will be important that producers then become more able to manage those business risks. The things to be mindful of in thinking about price volatility or any kind of risk management is that the Governments and the EU do not want to get into the business of trying to manage those business risks. It should be targeted towards the catastrophic-type end of those risks and not look at the day-to-day. In considering any shift that moves towards the US and Canada-style insurance market, there are significant difficulties in getting those markets and systems to work as you would want them to work in the first place. Then there is also the issue that they should not sit on top of the income support arrangements that are there as well; you should not be doing both. Income support arrangements do have some level of risk management to them; we have not touched on that so much today, but they are an alternative way in which to do insurance. There are also issues with insurancetype arrangements with fiscal costs and the potentially open-ended nature of the liabilities that would be brought to bear with the budgets, and how that would work with the CAP and the financial regulations. I shall leave it at that. Q63 The Chairman: I have one final question, because I would be interested in having your perspectives. In the evidence we took from the Commission last week, Mr Haniotis made the observation that he thought we should be much more focused in future on land than on individual crops or sectors. There are questions about greening and the extent to which farmers contribute to the broader rural economy. How do you see the role of public policy with regard to how farmers sit in that bigger space, beyond agricultural production? Dr Jared Greenville: The OECD in our regular reporting on the CAP has been supportive of those moves. Moving towards something more decoupled is essentially code for more land-based areas payment and greening. The key would be in defining what the outcomes are, and making sure that payments actually deliver on those outcomes. As you get more into these environmental services, monitoring and enforcement becomes more difficult and expensive. Thinking towards more market-based design for some of these instruments would also be a worthwhile endeavour, rather than it being done purely on the basis of registered facts and so forth, in order to get the most out of the government spend.

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New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63) Sir Lockwood Smith: I have no argument with that at all. I would wrap that up with thinking about sustainability as we look to the future. The Government have a legitimate role in making sure that custodians of our land manage it in a sustainable way, looking to the future. One thing that has not been talked much about today is global value chains and their rise and impact potentially on price stability. I wanted to leave you with one thought about that, because it is fascinating how it is developing so rapidly. The main New Zealand dairy company, Fonterra, has a significant investment in the Netherlands. In Europe, you produce a lot of cheese, and we do not produce so much in New Zealand. One by-product of cheese production is lactose production, so the New Zealand investment in the Netherlands exports to one of your companies here in the UK, Dairy Crest, lactose by-product produced out of the Netherlands. Your company, Dairy Crest, with which Fonterra also has a joint venture operation, turns that lactose into galacto-oligosaccharide, which is a very valuable ingredient in infant formulae. Dairy Crest also produces a fair bit of cheese, and from that it has a by-product, demineralised whey. Fonterra then exports both that demineralised whey and the galacto-oligosaccharide to a joint-venture company that it has in China called Beingmate. In China, they then manufacture that then into infant formula, which is sold across China by this joint venture and by Fonterra. So there you have a value chain starting on one side of the world in the Netherlands, passing through the UK, where a lot of value is added. The final product is manufactured in China and marketed across China—and a New Zealand company, Fonterra, has organised all that and invested in it. We would see much more of that kind of investment if there were not the impediments and barriers to ingredient import and export within the EU. That is a classic example of how you could see much more product diversification and utilisation of products that are not returning high value in the EU at the moment, if only markets were less constrained by trade constraints. To me, it is a classic example of where the future lies, and where greater stability and greater return will come, as these products are turned into far higher-value products. The Chairman: That is a very interesting perspective. I am going to draw it to a close. You may have seen that we were joined by Lord Boswell part way through; he is taking a great interest, not just as chair of our main European Union Select Committee but because he is a farmer. We appreciate your interest, Lord Boswell. Thank you, both, very much for coming and giving such interesting, insightful and thought-provoking evidence.

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NFU Mutual, Barclays Agriculture, European Investment Bank, and HSBC— Oral Evidence (QQ 64–73)

NFU Mutual, Barclays Agriculture, European Investment Bank, and HSBC— Oral Evidence (QQ 64–73) Transcript can be found under Barclays Agriculture, European Investment Bank, HSBC, and NFU Mutual — Oral Evidence (QQ 64-73)

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NFU Scotland — Written Evidence

NFU Scotland — Written Evidence Executive Summary 

With the other UK farming unions, NFUS has presented a united front throughout the summer of 2016 to encourage measures that will help UK agriculture through the current pricing crisis.

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As highlighted by our sister organisations, UK farmgate prices are currently unsustainable and at a historic low across all agricultural commodities, due to a complex combination of global influencing factors. In the interests of non-duplication, the measures put forward in this response are not sector-specific as the issues facing most agricultural sectors have been well-documented.

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This NFUS response reiterates the points delivered in our submission to the House of Commons Environment, Food and Rural Affairs Committee in October 2015 as part of their inquiry on farmgate pricing. NFUS is keen to highlight the ten key measures that government can implement, which we consider to be of most importance to our members and the agricultural industry.

Farmgate pricing: specific considerations for Scotland Farming is heavily affected by weather and extreme price and cost volatility, in an increasingly global market. Scottish farmers mitigate what is in their control, but low prices coupled with a reduction in CAP receipts will lead to drastic action by farmers – scaling down operations, laying off staff, and cutting back their use of ancillary services which are significant contributors to rural economies. For producers in Scotland’s remote and mountainous areas, where the land provides few options, a sustained period of low pricing will lead them to consider exiting the industry. Total Scottish farm income in 2014 was £823 million19. Of this figure, 68 per cent (£560 million) was subsidy and grants, demonstrating how significant public funding is to income. Comparing the £560m subsidy with output, the picture is more complex. Scottish agricultural output in 2014 amounted to £3.15 billion; costs were £2.85 billion. Therefore, the average farm subsidy equated to 18 per cent of eventual output. A breakdown across the commodities shows that: 

Beef - Subsidy is 42 per cent of output, and over 200 per cent of income

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Sheep – 34 per cent of output / 240 per cent of income

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Dairy – 9 per cent of output / 50 per cent of income

Ten measures to ease the current crisis in farmgate pricing 1. Encourage collaboration between governments and the supply chain. Farmers can mitigate what is in their control e.g. farming systems, cost efficiency, technical efficiency, diversify, financial planning and so on. However, markets are not in our control, and cost and 19

‘Total Income From Farming, Estimates for Scotland 2012 to 2014’, Scottish Government, 2015: http://www.gov.scot/Resource/0046/00469120.pdf

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NFU Scotland — Written Evidence prices are unpredictable, which all compound to deliver huge risks to farming businesses, particularly as the value of public support declines. The sustained nature of the current downturn suggests the need for strong leadership, so there is a role for the UK and devolved governments to take action to ease the current pressures on the industry. However, the present difficulties in the farming sector are being felt globally, so collaboration must also take place with European colleagues, wider actors throughout the supply chain and industry, and of course farmers on the ground. 2. Recognise that the supply chain is dysfunctional and address Unfair Trading Practices. Scottish and British produce has for too long been devalued by retailers who use short-term promotional ‘loss leaders’ to attract custom – leading to a race to the bottom in pricing. Unfair trading practices throughout the supply chain must be weeded out. Governments and the industry should endorse measures that will share risk and reward equitably throughout the supply chain. The Groceries Supply Chain Code of Practice (GSCOP), underpinned by the appointment of Christine Tacon as Groceries Code Adjudicator (GCA) aims to deliver a better working environment for all actors throughout the supply chain. However, some of the factors worsening prices, such as food labelling, price setting and use of competitive tendering are currently out-with the GCA’s remit. NFUS understands that the response of the Coalition government to the previous House of Commons Environment, Food and Rural Affairs Committee’s Fifth report of the 2014-15 session was not positive that the Ministerial powers set out in the Groceries Code Adjudicator Act 2013 would allow an extension of her jurisdiction. However, NFUS would argue that the protracted state of crisis in which many Scottish and UK farmers currently find themselves would merit further urgency to the 2016 Review. We urge the Committee to press government on what the terms and desired outcomes of the review will be, and whether any statutory powers could be exercised by the government before then in order to give the adjudicator the necessary clout to protect primary producers. In the same vein, government should also ensure that other voluntary codes are being adhered to – the Dairy Voluntary Code of Practice in particular. Here we have a valuable tool to set out good practice for contracts between producers and purchasers, but it can only instil fairness and confidence if it is supported by all in the supply chain. Where the voluntary approach is proven not to work, government should consider making such codes statutory. 3. Implementing measures to manage market volatility. The Government’s Budget proposal to average taxes over a five-year period is a welcome change that has been pushed for by NFUS and the other UK unions for some time. Considering the sustained crash in farm incomes, NFUS argues that this change of policy – when it is implemented in March 2016 – should be applied retrospectively from the 2013/14 financial years onwards. There are further tools which can assist: 

Ministers should encourage the development of futures markets for more agricultural commodities, to allow producers to ‘lock in’ to a forward commodity price to ensure price stability. Price transparency provided by a futures market would help prevent market failure.

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NFU Scotland — Written Evidence 

As a member state of the European Union, the UK Government should call upon the Commission to initiate a review of the intervention reference thresholds for Public Intervention on butter and skim milk powder.

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Consider risk-management tools that can mitigate against the worst consequences of volatility (see Annex 1).

4. Country of Origin Labelling. Consumers find it difficult to know where the food they buy comes from – an issue which is not helped by misleading promotion labelling practices witnessed first-hand by NFUS in big-name retailers in recent weeks. Retailers and food service companies should address product labelling as a matter of urgency. Country of Origin Labelling (CoOL) should be examined by the Scottish, UK and European legislatures as a tool that will ensure greater transparency. A greater prominence and wider adoption of QMS, Red Tractor and other domestic provenance logos would also allow consumers to actively support Scottish and UK producers through their purchasing. 5. Promotion and opening up new markets domestically and abroad. Now is the time for enhanced promotion of UK produce in new markets both in the EU and further afield. UKTI should integrate better with Scottish food promotion bodies to open and promote Scottish food and drink in export markets as part of the British brand. Domestic promotion is also essential. 6. Redressing internal fairness. UK ministers must urgently address the allocation of the UK’s €230 million CAP convergence dividend from the EU. Scotland, with the third lowest pillar one (direct support) payment rate per hectare in the EU was the reason why the UK received this dividend, and NFUS has been fighting since 2013 for a reconsideration of the UK Government’s decision to split this funding on the basis of historic allocations. Defra ministers should provide further detail and a timescale for its promised review of the decision, with a view to achieve similar payments for similar land classes across the UK as soon as possible. 7. Investment in the industry. There is potential for the European Investment Bank (EIB) to provide investment support for small and medium-sized enterprises in the agriculture sector. We call on UK ministers to work proactively with European colleagues, the Commission and the EIB to urgently explore options for short-term loans to provide liquidity to farm businesses. Member states should also be able to use state aid to support farmers with liquidity problem as soon as possible. Investment in processing infrastructure is lacking in Scotland, which leaves Scotland far behind other global exporters. NFUS encourages the UK and Scottish governments to strengthen investment in farming, processing, research and innovation in Scotland in order for it to become more resilient as part of an ambitious and forward-looking agriculture sector. 8. Increasing supply chain confidence. NFUS recognises the benefits of contracts for certain agricultural sectors. However, NFUS wants to see processors and retailers adopt clear and transparent approaches to sourcing and pricing so that farmers and producer organisations can make informed decisions, and sourcing commitments can be delivered back to farmers. Government should recognise collective groupings (whether in the form of co-ops or producer organisations) and allow them to invest in infrastructure to take advantage of domestic and export opportunities. 280 of 373

NFU Scotland — Written Evidence Processors have an important role in building long-term relationships between producers and retailers, allowing producers to innovate and invest, and working collaboratively with farmer suppliers to ensure the correct signals are sent out with regard to demand and product specifications. Retailers should ensure that declared and stated support for British and Scottish produce translate into genuine changes to purchasing priorities, by sourcing products that qualify for Scotch Beef PGI, Scotch Lamb PGI, Specially Selected Pork, and Red Tractor labels. 9. Making policy based on sound science. Progress in food production has historically been the result of advances in science. There is a significant risk that Scottish agriculture will be left behind due to a perceived and anti-science agenda in Europe. Funding and expertise is shifting away from Europe to other markets with a more positive attitude. Government must base decisions on sound science and use funding to encourage research and knowledge uptake. NFUS wants Scottish farmers to be able to compete on a level playing field by making use of controlled innovation in food and farming. Support for sound science and technology in agriculture can only improve the diversity of the UK’s agricultural industry; shaping sustainable agriculture and boosting the potential for exports. NFUS is therefore disappointed in the Scottish Government’s recent announcement ruling out the cultivation of GM crops – a decision which puts Scotland at odds with our neighbours elsewhere in the UK – and remains convinced that there is scope for rational debate on the benefits of biotechnology in the Scottish agriculture sector. 10. Reducing red tape. Policy-makers must recognise that regulation can all too often stifle innovation and add costs. An effective CAP should deliver stability for primary producers, allowing them to invest for the future when global prices are good, and providing insulation when prices take a sustained downturn. However, the CAP we have now is technocratic, driving support away from the areas that need it most particularly in Scotland and burdening farmers with regulation. NFUS welcomes the Scottish Government’s enthusiasm to promote Scotland’s food and drink industry, however considers that this can only be done if primary food producers are allowed to be competitive. The ‘greening’ of the CAP is an important element, but the insidious creep of regulations and cross-compliance is increasing uncertainty and making primary food production increasingly difficult to deliver. NFUS would also question the extent to which the costly greening exercise, in its current form, delivers real environmental benefit. As we look to the next round of negotiations for the 2020-25 CAP spend, simplification must be the priority. The unique circumstances and needs of the devolved nations should be recognised throughout this process and also with the application of domestic directives such as the Living Wage. This will place Scottish growers at a competitive advantage as the Scottish Agricultural Wages Board requires all workers to be paid the same rates, regardless of age. ANNEX 1 – EXTRACT FROM NFU SCOTLAND PAPER ON PRICE RISK MANAGEMENT IN THE DAIRY SECTOR, OCTOBER 2015 Why should farmers consider price risk management? Farming is risky, dependant on weather, animal health, human health, politics, public opinion, and now extreme price and cost volatility, in an increasingly unforgiving global market. We mitigate what is in our control e.g. farming systems, cost efficiency, technical efficiency, 281 of 373

NFU Scotland — Written Evidence diversify, financial planning etc., but markets are not in our control, cost and prices are unpredictable, which creates a huge risk to farming businesses, particularly as the value of public support declines. So what can we do about price and cost risk? As the last link in the supply chain farmers have limited options. Improved supply chain collaboration and producer influence within the chain via Producer Organisations, Codes of Practice and even legislation, will help, but are there also credible risk management instruments that farmers can utilise? We either have to accept risk as an occupational hazard, or investigate avoidance tactics, transfer, share, or reduce the burden of risk. One option is Hedging: ‘A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities’. Many see hedging as speculative, even gambling, but this should not be the case. Why seek to hedge income risk? To know what is coming and be able to plan. Extreme income volatility has undesirable consequences on farms and processing causing unpredictable cash flow issues, compromising investment plans and confidence. Hedging can offer more certainly, more confidence in forward planning and more credibly with the banks, as there is more predictability. Hedging in this context should not be confused with speculation.

The graph above illustrates the ‘hedged’ line takes away the troughs, but also the peaks, so producers and processors have less extremes. International studies indicate hedging contracts, pay slightly less than the market, but benefit by delivering more certainty and predictability, with less extremes of cash flow. So the trade-off is certainty and predictability delivered by hedging at least a portion of milk volume, against the riskier market option which may deliver a slightly higher average price, but with this the uncertainty and unpredictability. The graph below illustrates an actual comparison based on the hedge option in the Dairy Farmers of America Contract, where the hedge delivered $14.27 against the market average of $14.40. So slightly less, but more predictable. 282 of 373

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A few actual options to consider. US Margin Protection Program US government scheme, 2014, replacing previous efforts to support dairy farmer’s margins. Dairy farmers can opt to lock in margin over feed costs for 25% to 90% of production. They can choose their minimum margin level between US$4/cwt and US$8/cwt (6 to 14 €cents/litre). The default is US$4 for 90% of production, free except admin fee (called catastrophic cover level!) at a cost $100 flat admin fee. Above the ‘free’ (catastrophic cover level), higher ‘premiums’ can be paid on a voluntary basis pro-rata to cover higher margin. The benefit to the producer is the payment of difference between actual margin over feed costs and covered margin, which leaves the producer to estimate the amount of insurance to add certainly and predictability set against market fluctuation. This may appear to offer no incentive to reduce volumes when prices are deflated, but it must be acknowledged that minimum payments are very low, and higher premiums will be a cost, so there is no real incentive to increase supply. However, it does offer protection against extreme margin pressure. Fixed price/margin contracts In Ireland, Glambia offer a fixed price and partial cost indexation. Based on sharing risk between the customer, Glanbia and farmer this initiative has proved popular with suppliers and has the additional value of buy in across the entire supply chain, offering predictability for all players. As with the other models the price or cost may not be the best for any of the chain, at any given time, but the benefit is predictability, allowing longer term certainty and planning. Fonterra has offered a similar option recently and was also popular with producers. Both schemes are voluntary with fixed volumes and producers can opt for a % of production.

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NFU Scotland — Written Evidence Fonterra Guaranteed Milk Price Introduced summer 2014, after successful pilot of 328 farmers for 13/14 season. The pilot offered bids for a price NZ$7/kg MS (approx. 30€c/l) for a limited volume of milk. The offer was oversubscribed and scaled back accordingly oversubscribed but proved popular. In 2014/15 the scheme was extended with restricted volumes offered at June and December at a range of prices ranging from $6.60 to $7. The decision for the NZ famers was how much and at what level to bid for, e.g. if no bids for $6.60 then the offer moved higher. Again the trade-off was certainty against the risk of the market price being higher than the bid price. This scheme also had buy in from the end customer with Fontera offering range of risk management options. This innovation has been dropped recently, but will be reviewed shortly. Intervention and Private Storage Intervention (EU Commission buys product) and private storage (EU subsidises storage of privately owned product) to take product off the market remain in the EU ‘tool box’, but the intervention reference price for Skimmed Milk Powder is now very low in comparison with the market, and as we have experienced this year has been largely ineffective. If the level was set at a realistic price, with due consideration to the market value and cost of production is should be achievable to set a floor without encouraging over supply. Intervention has the benefit of being under the control of the Commission, which should ensure that resale is measured. Private storage is cheaper option for Commission, but private companies still have measure of control and can upset a rising market if they decide to sell too early. Tax exempt saving funds? This initiative was introduced in New Zealand to farmers, fishermen and foresters and is known as the Income Equalisation Scheme. The premise is for farmers to put away funds in special tax-exempt savings accounts in good years and bring the funds back into business within 5 years to be taxed as income in poorer years. The 5 year tax averaging is also an option where by tax calculations are averaged over the 5 years. The Income Equalisation Scheme has the attraction of withholding cash in good years, tax free, and only taxed paid when it is taken out in more difficult times, offering little more flexibility. EU Policy There is a pressing need for EU policy to recognise that volatile markets and global competition are a huge challenge to all sectors, and in particular to dairy. The focus should be on new initiatives as well as ensuring existing market measures are current and effective. There is definitely a case to fully address the opportunities of a dairy futures market, underpinned by high quality and reliable market information and a suitably supported and audited futures platform. Existing measures are being tested to their limits and need to be reassessed, evolved and improved. Political and commercial policy should be aligned and react to the challenges of risk. Scottish and UK Policy UK and the devolved Scottish government must also address the challenge of increased risk for the industry and particularly dairy. There is clearly a need to take a proactive view and develop actions to mitigate against the worst consequences of volatility, globalisation, and 284 of 373

NFU Scotland — Written Evidence managing risk. Government must work with industry to develop options to reduce the impact of risk on investment, employment, and future sustainability. We can’t ‘fight’ the market, therefore, we collectively have to learn to react to the challenges. 21 December 2015

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Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence

Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence Thank you for the recent correspondence regards the Lords EU Energy and Environment Sub-Committee Inquiry into Responding to Price Volatility: Creating a More Resilient Agricultural Sector. This and related issues have been considered by the Northern Ireland Assembly Committee for Agriculture and Rural Development on a number of occasions over the last two to three years. The Committee has agreed that the farming industry as a whole has experienced an unprecedented number of crises over the last few years, with the latest in a long line being that of prices in the dairy sector. The Committee has spent considerable time since 2012 talking to various sectors of the industry and major stakeholders such as trade bodies, the grain and fertilizer suppliers, banks and financial institutions, retailers and processors as well as the private sector advisors and consultants who work closely with farmers.

The

Committee has commissioned various research papers on these issues, copies of which are linked below for information. The following response is therefore based on the evidence gathered from this wide, varied and knowledgeable range of stakeholders. 

Agri Price Differentials - Autumn 201220

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ROI Diary Industry State - Winter 201421

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ROI Diary Industry Supplementary Info22

The sectors and locations where falling farmgate prices are affecting farmers, and the main causes of price reductions; The outcome of the work of the Committee in its discussions and consideration of volatility in the farming industry in Northern Ireland is that it can affect any sector, is often unpredictable and can be caused by the interaction of a multitude of factors, many of which are beyond the control of the individual farmer. Some of those factors are listed below. The Committee is confident that the Lords EU Sub-Committee will be familiar with these as they undoubtedly affect all UK farmers. They include:-

20

http://www.niassembly.gov.uk/globalassets/documents/raise/publications/2013/agric_rural_dev/4613.pdf http://www.niassembly.gov.uk/globalassets/documents/raise/publications/2015/dard/2915.pdf 22 http://www.niassembly.gov.uk/globalassets/documents/raise/publications/2015/dard/3015.pdf 21

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fluctuations in prices of grains, fertilizers and energy prices – rising input costs over which the farmer has little control without being able to achieve a corresponding rise in the output price;

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the complexity and lack of transparency in the food supply chain, which was demonstrated in the “horsemeat scandal”. There are often multiple steps in the food supply chain between the producers i.e. the farmer and the final consumer. This contributes to the bargaining power gap between farmers and the other operators in the food supply chain;

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fluctuations in currency exchange rates can impact on the ability to grow and sustain food exports – the current euro / sterling exchange rate is unfavourably impacting on export sales of food produce from Northern Ireland;

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politics on the world stage often have unexpected and unforeseen consequences as demonstrated by the Russian / EU bans and its ultimate impact on the pig and dairy sectors;

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economic conditions outside of the EU such as China can affect demand for food produce on a world-wide scale;

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weather conditions both at a regional, national and international level e.g. a drought in USA can impact on world-wide availability, quality and cost of grain. Imported grain is the main source of feed for the poultry and pig farmers in Northern Ireland;

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changing consumer demands and changing specifications by processors, without industry consultation i.e. number of residence for beef cattle;

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EU Regulation such as the Country of Origin Labelling which has had an impact on the sheep and beef industry in Northern Ireland.

The dairy industry in particular has experienced one of the sharpest and most prolonged fall in prices that it has seen in its history. In its conversations with various dairy farmers the Committee has been made aware that for some the monthly “milk cheque” from the processor has been halved over the space of 12 months. The Committee acknowledges that Northern Ireland does have some of the most efficient and effective dairy farmers in the UK, who are dedicated to their business and to the welfare of livestock.

But the practical

realities of a farming business are that it cannot respond instantly or quickly to such rapid and unprecedented changes in demand.

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Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence The dairy sector makes a significant contribution to the local economy of Northern Ireland. It accounts for 33% of gross agricultural output, provides employment on over 3,000 farms, has a gross turnover of circa £1 billion and employs over 2,000 people in the processing sector. The dairy industry in Northern Ireland had been expanding even during the recent economic downturn and has been seen by many as one of the industries which could assist Northern Ireland to exit the current recession. Northern Ireland, despite being one of the smaller regions of the UK, is the second largest milk producing region in the UK. In Northern Ireland the situation in the dairy industry is exacerbated by the fact that, unlike the other jurisdictions of the UK, we export between 70% - 85% of our milk produce (mostly as dried milk powder) and do not have a reliance on the liquid milk market. The Northern Ireland farm gate price of milk (pence per litre) has been falling steadily for producers since 2013. For example, during 2014 milk prices in NI fell by 11 pence per litre from 33.91ppl to 22.79ppl whilst prices in GB fell by 5ppl. This difference stems from the fact that GB is not self-sufficient in dairy products and it has a large liquid market whereas the NI dairy industry is heavily dependent on export markets and global trading conditions. Statistical information from the Department of Agriculture and Rural Development (DARD) shows that in August 2015 the Northern Ireland average farm gate price of milk (including retrospective bonuses) was 18.65 pence per litre, 8.64 pence per litre lower than August 2014. The Sub-Committee may find the information on milk production and prices, which is produced by DARD in Northern Ireland useful and it can be found at http://www.dardni.gov.uk/index/statistics/agricultural-and-market-prices/statistics-milk-priceand-production-statistics.htm The Committee would ask the Sub-Committee to note that Northern Ireland is the only part of the UK to share a land border with another Member State. In recent years that has led to specific difficulties with both the cattle and the lamb trade.

In May 2015, the

Committee heard from lamb farmers regarding issues facing them after the introduction of new EU regulations on Country of Origin Labelling (CoOL). Traditionally Northern Ireland lamb producers have taken the majority of their animals across the border into the Republic of Ireland for processing.

However the introduction of new EU Labelling laws has

unfavourably impacted on these farmers as some processors have indicated a reluctance to accept Northern Ireland lamb. This is because under the new regulations the lamb would

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Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence need to be labelled as bred in one Member State and processed in another – a fact that appears to make the supermarkets and retailers nervous. The issue was not helped by the fact that the euro/sterling exchange rate was and remains unfavourable. The labelling issue also impacted on the cattle sector. Farmers from both jurisdictions often trade cattle across the border for finishing and slaughter. Such cattle normally match the specifications and quality demanded by the processor but the labelling issue again appeared to leave the retailers unwilling to accept produce from what has now become known as “nomad” cattle. The anticipated short, medium and long-term impacts on the dairy, meat and arable sectors; Agriculture, food production and processing contribute more to the Northern Ireland economy than in other jurisdictions of the UK. Agriculture accounts for 1.4% of Gross Value Added (GVA) in NI, considerably higher than the UK average of 0.6%. Similarly, agriculture, forestry and fisheries accounts for 3.1% of total employment in NI, exceeding the UK average of 1.1%.23 The industry has been successful in achieving impressive export sales whilst operating in a difficult business environment. Despite being faced with rising energy and other input costs, difficulties in the financial markets and increased competition for its produce, food and drink is the largest manufacturing base in Northern Ireland.

It has

continued to grow and create jobs when other sectors were in recession. The Agriculture and Rural Development Committee has noted that despite this, the series of crisis after crisis has meant that even the most effective and efficient producers have found it difficult to manage both (i) the sustained and sharp reduction in prices and (ii) the unexpected and constantly changing market conditions. One way dairy farmers have begun to respond is by reducing herd size. But the de facto impact of this is that they will need time to get back up to speed once demand rises. The Committee would ask the Sub-Committee to note that there is a demonstrated 40p / kilo difference in beef prices to farmers in Northern Ireland compared to farmers in other regions of the UK. There is also a substantial negative difference in the price of pork paid in Northern Ireland and other parts of the UK. This again is a great frustration to the industry

23

DARD Northern Ireland Agri-Food Sector Key Statistics June 2015 http://www.dardni.gov.uk/northern_ireland_agrifood_sector_key_statistics_2015_final.pdf

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Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence as they cannot see justification for the difference in price given that the animals reach the same standards and specifications as animals in other parts of the UK. The government’s role in supporting farmers and securing UK food production; The Committee has noted that many within the industry who have presented to it outlined the following areas where the government could and should have a role in supporting farmers:1. while Northern Ireland farmers are recognised as some of the most effective and efficient in the UK, government has a role in researching, developing and promoting effective production methods such as a sustainable grass rich approach and in encouraging farmers to be more efficient before considering expansion i.e. better before bigger; 2. tools to manage or reduce the impact of volatility such as:o introduction of a farm management deposit scheme; o capital holidays for farm business long term loans; o re-align capital allowances for NI farm businesses; o appropriate and consistent level for the Annual Investment Allowance; and o assisting the industry to examine the potential for an insurance fund whereby a certain amount of profits obtained during a period of peak prices are invested in an insurance fund for periods of lower prices. 3. work with and encourage Banks and other financial institutions to put in place options such as:o working capital facilities; o capital repayment freeze; or o interest-only repayments for a period of volatility. The Committee has noted that there is some concern that the priorities of DEFRA may be different to those of DARD. One example was the difference in the stance on a rise in the Intervention prices for dairy produce which in the view of the main Northern Ireland dairy stakeholders such as UFU and Dairy UK was the short term solution necessary for the immediate crisis facing dairy farmers. The Committee has further noted that the UK Secretary of State Liz Truss is advocating an EU level working group to explore the future of the dairy industry in a post quota era, the

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Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence scope for a futures market and insurance protection. She has also called for a second working group at devolved government level on best practice for branding, labelling and procurement. The Committee is keen to ensure that these groups take account of the unique and special circumstances of Northern Ireland Farmers and to see outputs from these working groups as soon as possible. The Committee welcomed the recent announcement regarding plans to extend the period for which self-employed farmers can average their profit for income tax purposes to five years. Where the different UK nations are particularly effective, or ineffective, in supporting the dairy, meat and arable industries; The Committee draws attention to the Northern Ireland Animal and Public Health Information System (APHIS), which is DARD’s primary repository for information on food animals and their keepers and has been in place since 1997. APHIS currently supports almost all the day-to-day business of Veterinary Service and many other areas of the Department. It plays a key role through the Rural Portal and other interfaces in the delivery of electronic services to the livestock and food industry. It is recognized as being an effective tool in supporting the farming industry in Northern Ireland. Conversely, the Committee is currently undertaking an Inquiry into Better Regulation. As part of that Inquiry it has examined how DARD implements and polices certain EU regulations finding that Northern Ireland often has the most severe interpretation of the EU Regulations of any of the UK jurisdictions and the Republic of Ireland. Whilst the Inquiry is on-going the Committee has expressed concerns that this is negatively impacting on farmers. The Committee will continue to examine how it can encourage DARD to bring its interpretation of regulation closer to that of other jurisdictions. The Committee draws attention to a specific problem in the pork industry in that UK exports of offal to China currently excluding Northern Ireland produce. It would appear that this is due to a breakdown in communications between DARD and DEFRA which in the opinion of the Committee needs to be addressed as soon as possible. The effectiveness of EU measures in addressing the impact of market surpluses on prices; With reference to the Dairy Industry, this is a topical issue and the Committee is of the opinion that the current intervention threshold price for dairy is much too low and that it 291 of 373

Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence needs to be raised immediately.

The Committee was very disappointed that this did not

occur as a result of the Special Agriculture Meeting in Brussels on 7th September. The Committee noted that the recent package of measures announced by the EU Commission as a result of the Special Agriculture Council 7th September 2015 including targeted aid of which £5.1m will come to Northern Ireland. While this money will go directly to dairy farmer and is welcomed, the Committee believe that much more is needed to assist farmers with the cash-flow difficulties they are experiencing as a result of sustained and sharp drop in milk prices. Actions that are geared to stabilising markets and addressing the functioning of the supply chain are in the opinion of the Committee largely focused on assisting recovery in the medium to long term. Farmers need immediate assistance now or they will go out of business. What support, if any, processors and retailers should give to UK farmers and produce. Examples could include, but not limited to, long-term contracts, improved labelling, reduction in overseas imports; The Committee believes that there is unfairness in the food supply chain and that too often the farmer is disadvantaged especially when it comes to the price received and profitability for their produce. The Committee believes that a change in mind-set is needed by others in the food supply chain including processors, suppliers, retailer etc. that recognises this. Ultimately such as position is not sustainable.

Retailers and processor must pay more

attention to the effects that their pricing policies have throughout the supply chain. The Committee would refer you to the paragraph 13 above where it refers to the difference in price paid to farmers by processors for beef cattle and pork. The Committee also believes that more could be done to reduce overseas imports on food produce and Members made particularly reference to beef from Brazil. The effectiveness of the regime established under the Groceries Code Adjudicator Act 2013 in ensuring fair and stable prices, including for dairy and meat producers. The Committee understands that the role of the Groceries Code Adjudicator is limited to one section of the food supply chain (specific retailers and their suppliers) and is therefore very limited. The Committee noted with interest discussion at EU Level on the food supply chain and unfair trading practices and the focus on how the bargaining power gap between

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Northern Ireland Assembly Committee for Agriculture and Rural Development —Written Evidence farmers and others who operate within the food supply chain can be addressed. Committee would welcome similar discussions beginning in Northern Ireland and UK. 11 November 2015

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The

Organisation for Economic Co-operation and Development, and New Zealand High Commissioner — Oral Evidence (QQ 52-63)

Organisation for Economic Co-operation and Development, and New Zealand High Commissioner — Oral Evidence (QQ 52-63) Transcript can be found under New Zealand High Commissioner, and Organisation for Economic Co-operation and Development — Oral Evidence (QQ 52-63)

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Royal Agricultural Society of England, Agriculture and Horticulture Development Board, and Menter a Busnes — Oral Evidence (QQ 29-37)

Royal Agricultural Society of England, Agriculture and Horticulture Development Board, and Menter a Busnes — Oral Evidence (QQ 2937) Transcript can be found under Royal Agricultural Society of England, Agriculture and Horticulture Development Board, and Menter a Busnes — Oral Evidence (QQ 29-37)

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Rural Business Research — Written Evidence

Rural Business Research — Written Evidence Rural Business Research (RBR) is the consortium of leading agricultural universities and colleges that combines the forces of some of Britain's top researchers in the field of farming, the environment and rural business. RBR’s main research programme is the Defra-funded Farm Business Survey (FBS) research programme, providing Defra with contemporary data and analysis on the economic and physical performance of farm and horticultural businesses. The FBS data contributes to the UK’s submission to the European Farm Accountancy Data Network (FADN) under the Treaty of Rome obligations. RBR comprises the Universities of Nottingham, Cambridge, Reading and Newcastle and Askham Bryan and Duchy Colleges. The fore-runner to the FBS was established in 1936 to support the evidence requirements of Government needed to set agricultural prices used by the agricultural marketing boards (established in the 1930s). 1. We seek evidence on any aspect of the topic and particularly on the following questions: What is the role of public policy in mitigating the impact of potential price volatility? To what extent should the response be a shared endeavour between the EU institutions and Member State governments? What are the differing roles of industry on the one hand and individual farmers on the other? Currently the main public policy that mitigates the impact of price volatility is the Basic Farm Payment (formerly Single Farm Payment) that farmers receive from the Common Agricultural Policy. On average, for the 2014/15 financial year, data from the English Farm Business Survey (FBS) shows that this Single Payment accounted for 56.4% of the Farm Business Income (profit) that farmers achieved (see para. 10.1 for details). Because this payment is known (and hence relatively fixed, with the exception of currency fluctuation impacts) the payment contrasts with income derived from variable price and outputs achieved from a number of agricultural commodities. 2. Should public policy responses make a distinction between support for the resilience of the industry as a whole, support for the resilience of specific sectors and support for the resilience of individual units of activity? Public policy should not be primarily focused on the resilience of individual businesses per se., as this will hamper innovation in the sector. Public policy targeted at specific sectors is arguably important for the provision of key food commodities, and the provision of ecosystem services primarily delivered via agricultural production activity (e.g. farming in the uplands). It is vital that the development of public policy responses, and their subsequent analysis, continues to be based upon independent robust data on the performance of the agriculture and horticulture sectors, as currently occurs by drawing on the highly respected Farm Business Survey (FBS) data. 3. Currently, what are the key elements involved in the industry’s management of price risk? What further tools are needed? See response under 8.1 below 4. What effect has the commoditisation of agricultural goods had on the ability of farmers to respond to risk effectively? How are farmers to mitigate the onfarm effects of volatile global commodity markets and currency fluctuations? Since the 1960s in particular, farmers have, in general, become more specialised in the commodities that they produce. This has typically resulted in economies of scale and 296 of 373

Rural Business Research — Written Evidence efficiencies in production being realised, which has resulted in real-terms reductions in commodity prices (and hence food prices). However this has also led to a greater proportion of farmers being more reliant on a single or small number of commodity outputs from their farm. Thus, farmers’ exposure to price volatility in any one single commodity market is typically greater than was historically the case – in effect a ‘specialisation versus natural enterprise risk management trade-off’ has occurred. 5. What are the barriers to more effective on-farm price risk management, including longer term pricing mechanisms, diversification, co-operative working and leasing? How can those barriers be overcome and what is the role of EU and national public policy? Although farm businesses have typically become more specialised over time with respect to their agricultural activities (see 4.1), farmers have also engaged with additional income generating activities, including diversifying their business activities drawing on a range of farm and non-farm resources (including value-added to farm produce via on-farm retail, recreation activities drawing on land resources, accommodation provision, including tourism and agricultural contracting). More recently renewable energy generation activities have represented key diversification activities (e.g. solar, wind, anaerobic digestion; RBR, 2015), albeit that barriers to entry often exist with respect to large-scale renewable energy production in terms of financial (large scale investment requirements) and regulatory (e.g. planning) factors. However, there has also been evidence that lending for ‘solar farms’ has become more common (RBR 2014a). The increased number of anaerobic digestion (AD) plants is leading to an increased area of maize production to supply feedstock for AD, displacing traditional agricultural commodity production in the locality of AD plants and driving up rental costs (for both traditional agricultural commodity production in addition to land for maize for AD production) (RBR, 2013). Other renewable energy opportunities, e.g. the production of dedicated energy crops have not resulted in large scale uptake, for a range of financial, personal, environmental and technical reasons and constraints. These reasons and constraints for the lack of uptake of these alternative land-based cropping possibilities have been identified, based upon analysis from the FBS data and from interviews with FBS cooperators, across both arable (Glithero et al., 2013) and livestock (Wilson et al. 2014a) sectors. Drawing on research within the FBS (Wilson et al. 2014b), RBR has identified that four-fifths of farmers undertake some level of cooperation, with just under one-half noting that this cooperation was considered to be ‘formal’. Dairy, Cereals and General Cropping farms typically cited cooperation as of more importance to their business, with sharing of machinery, joint harvesting, lending out breeding sires and arrangements for swapping straw for manure often being important. Typically, the drivers of cooperation related to compatibility / complementarity of farming styles and systems, personal attitudes, practical aspects (e.g. sharing labour) and profit. However, issues of biosecurity, previous bad experiences (e.g. sharing machinery) and neighbours being unwilling to cooperate, act as constraints to cooperation (Wilson et al. 2014b). 6. How ‘fit for purpose’ are market-based instruments? Could the marketplace help to mitigate risks by providing ways of smoothing out the impact of volatility? Are there ways in which EU and national public policy could encourage, and reduce the risk of introducing new financial products? 7. How realistic are terms for access to investment finance? What role is there for the European Investment Bank to support on-farm investment at a low cost? 297 of 373

Rural Business Research — Written Evidence What other instruments could improve access to finance in a volatile environment? Research undertaken by RBR demonstrated that ‘high performing’ farm businesses were typically associated with low levels of financial borrowing, while, relative to these high performing business, ‘improved performing’ farm businesses generally had greater borrowings. It is important to note that both of these groups of farm businesses had clear plans for the repayment of loans (Wilson 2014). Evidence from RBR’s twice yearly collation of contemporary issues facing farm and horticultural businesses has identified that for some businesses cash flow concerns (RBR 2014b) and lack of available credit for investing in machinery purchases to maximise capital allowances [for tax purposes] (RBR, 2015) act as constraints to business activities, however the underlying issues resulting in lack of credit in these circumstances is not known. Typically, successful farming business, in particular those with strong balance sheets underpinned by land ownership, are able to successfully borrow for appropriate investments. 8. What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation? For major crop commodities in particular (e.g. wheat), ‘futures market’ (agreed price for future transaction) contracts and ‘options’ (agreed price for future transaction, but with the option for the farmer to cancel the contract to take advantage of greater spot prices) are currently available to farmers (who produce major commodities – e.g. wheat) who seek to minimise the uncertainty associated with marketing commodities on the spot market; these market mechanisms (in particular options) incur a relatively large substantial cost to the farmer and reduce the incentive for farmers to engage with these market mechanisms, particularly so in periods of lower market prices. In addition to securing known output prices, forward purchasing of inputs (e.g. fuel, animal feed) is possible and undertaken by a small proportion of farmers. For some commodities (e.g. liquid milk), dedicated contracts with supermarkets on a ‘cost-plus’ basis link the output price to key input prices offering a ‘natural hedge’ against input-output price movements and explicitly reducing price risk. Research by RBR has identified that in dairy production, farmers operating within a dedicated (e.g. supermarket) price contract were more satisfied with their milk marketing arrangements than dairy farmers operating under non-dedicated contract arrangements (Wilson, 2011). The Rural Business Research Unit at the University of Cambridge, hosts RBR’s free to use on-line business tools (Business Benchmarking, Projection Calculator, Region Reports and Data Builder). These business tools are used by farmers, advisors and other stakeholders and currently attract 52,000 visits and 750,000 ‘hits’ per annum. Forward planning in farm businesses can be considerably enhanced by farmers making greater use of these publically available data sources and tools, e.g. the FBS Projection Calculator tool24 draws together evidence on future and current market prices and facilitates farmers in their forward budgeting planning for the major combinable crops and dairy production,. The tool also allows farmers to easily change the key price parameters within the Projection Calculator tool (e.g. if they have a known / agreed price for a commodity or input). More generally, this interactive budgeting tool allows farmers to test different price scenarios.

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http://www.farmbusinesssurvey.co.uk/FBS-Projector/

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Rural Business Research — Written Evidence Farm Business Benchmarking (e.g. the free-to-use Farm Business Survey (FBS) Business Benchmarking tool25 has been demonstrated to be associated with farm businesses that achieve substantially greater farm business income. Evidence from the FBS shows that “15% of farmers "frequently benchmark at whole farm level" achieving an average Farm Business Income (FBI) of £128,900 in contrast to £63,000 for the 85% of farmers that do not benchmark” Wilson and Ramsden (2014). Example unsolicited feedback of the use of RBR’s internet tools includes "[We] have used the Farm Business Survey [Internet Reports] as one of our main sources. [...]. Great job, by the way, from what we’ve seen it is probably the most comprehensive agriculture specific source out there!” Research undertaken by RBR, drawing upon a combination of quantitative data on FBS farms and qualitative information from case-studies undertaken on FBS farms, demonstrates that those farm businesses classified as high or improved farm businesses (with respect to Farm Business Income) are characterised by farmers/managers who pay attention to detail in their production activities, control costs effectively, and focus on the financial margins that their enterprises return, rather than on physical yield or output levels per se. (Wilson, 2014). Investment in financial budgeting and planning tools (as noted in 8.2 and 8.3), together with effective knowledge exchange activities (e.g. engaging the farming press in communicating the importance of farm business management) is necessary to increase the use of these budgeting tools. RBR has undertaken a range of activities that demonstrate these tools to farmers and advisors, and also towards training the next generation of farmers and farm managers. Specifically, RBR has made teaching material, linked to these publically available financial budgeting and planning tools, freely available to further and higher education institutes.26 Underpinning the success of independent budgeting and planning tools requires validated, high quality business data, as currently generated within the Defra-funded Farm Business Survey research programme that is highly respected within the industry. The support of the FBS programme by government is therefore a key aspect of assisting the development of enhanced business management in agriculture. 9. What role should innovation play in creating a more resilient agricultural sector? Should more be invested in scientific research which could have the potential to transform agricultural practices? Research undertaken by RBR on behalf of Defra, did not identify significant differences between farm business performance with respect to their update of innovation (Wilson et al, 2014b). However, this qualitative study (based on 60 case studies of Farm Business Survey participants) was undertaken at a single point in time and was not able to examine the impact of innovation uptake in previous time periods and the subsequent financial impact of this innovation in the following years. The research did identify that financial, efficiency and labour saving objectives are main drivers of innovation. Moreover, innovative practices are more likely to be undertaken by larger farm businesses, younger farmers, farmers with greater levels of education, farmers who are willing to take risks, farmers with access to own funds or credit, and farmers with greater networks and networking capacity. In addition, innovations that fit with current farming practices, and in particular where the innovation is

25 26

http://www.farmbusinesssurvey.co.uk/benchmarking/ http://www.farmbusinesssurvey.co.uk/resources/Default.aspx?module=LearningResources

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Rural Business Research — Written Evidence ‘pulled’ or demanded from the farming sector, are more likely to be successfully taken up (Wilson et al., 2014b). The major advances in agricultural productivity have been underpinned by a range of fundamental and applied scientific research in agriculture, with evidence of returns to investment in agricultural research in the USA of 32:1 (Alston et al, 2011). Given the returns from investment in agricultural research it is vital that continued investment be made in this area. Drawing on data from the FBS, there is evidence that the total factor productivity of UK agriculture has lagged behind major competitors, in part from a reduction in R&D investment (Thirtle et al., 2004). Research investment to address this low relative position is therefore required. In addition to scientific developments, there is a need to ‘close the yield gap’ in agricultural practice. Typically there is a large range of performance achieved across farm businesses within any particular sector (e.g. wheat [Wilson et al., 2001]; potatoes [Wilson et al., 1998]; dairy [Wilson, 2011]), and considerable efficiency gains would be achieved by reducing the inefficiencies identified in particular sectors via enhanced knowledge transfer activities. 10. How effectively does EU agricultural policy currently assist farmers to mitigate the impact of potential price volatility? Is there a need for management of price risk to be an explicit objective of the Common Agricultural Policy? The latest available Office for National Statistics data on Farm Business Income (FBI) obtained for the Farm Business Survey research programme, representing all farms types in England, indicates that for the 2014/15 financial year, the average FBI was £39,700 - of this £2,100 [5.3%] was generated from agriculture, £9,300 [23.4%] from Diversification, £22,400 [56.4%] from the Single Farm Payment Scheme (Common Agricultural Policy subsidy) and £5,900 [14.9%] from Agri-Environment activities (Defra, 2015a); partial analysis on these data indicates that the removal of the Single Farm Payment Scheme income would have reduced average incomes to £17,300 /farm. The variation in FBI over time also represents a particular challenge to the agricultural sector, with substantial year-to-year variation in the average FBI per farm (Figure 10.1). The range in FBI performance across businesses within each farm type is extensive: “Over a fifth of pig, poultry, mixed and grazing livestock farms failed to make a profit in 2014/15 compared to less than 10 percent of dairy farms. Moreover, around 70 percent of mixed and grazing livestock farms generated incomes below £25,000. Around 45 percent of dairy farms and almost a third of specialist poultry farms had an income of more than £75,000”. Defra (2015a). Currently the EU subsidy represents a key income stream to the average farm business and explicitly reduces exposure to price risk movement by providing a payment that is independent of agricultural market price volatility, albeit that within the UK this payment is subject to variation in the £:€ exchange rate.

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Figure 10.1: Farm Business Income (£/farm) by Farm Type, 2007-2013, England 180,000 160,000

All

140,000

Cereals Dairy

£/farm/year

120,000

General Cropping

100,000

Horticulture

80,000

LFA Grazing Livestock

60,000

Lowland Grazing Livestock

40,000

Mixed

20,000

Pigs Poultry

0 2007

2008

2009

2010

2011

2012

2013

Source: www.farmbusinesssurvey.co.uk accessed 3.12.15; Regional Reports, Table 4 - Time Series FBI

Figure 10.2 demonstrates the source of FBI from each of the four business cost centres produced within the FBS research programme. Note that for the 2013/14 accounting period shown in Figure 10.2, that the CAP subsidy FBI component (SPS) represents a large proportion of total FBI in particular for Cereals, General Cropping, Dairy, LFA / Lowland Grazing Livestock and Mixed farm types. A partial analysis of the removal of the SPS FBI component would have resulted in average total FBI for the Lowland Grazing Livestock sector in 2013/14 of approx. £0 /farm, and in the LFA Grazing Livestock Sector of approx. minus £2000 /farm.

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Figure 10.2: Farm Business Income (£/farm) by Cost Centre, 2013/14, England 180000 160000 140000 120000

£/farm

100000

80000

SPS

60000

Diversification

40000

AES

20000 0

Agriculture

-20000 -40000

Source: www.farmbusinesssurvey.co.uk accessed 3.12.15; Regional Reports, Table 9 – Business Output, Input Costs and Income.

11. What long term changes should be made to the Common Agricultural Policy to support the agricultural industry in responding to price risk more effectively? Should insurance schemes play a more prominent role? The changes to the Common Agricultural Policy (CAP) over recent decades have resulted in a movement away from production-linked (price support) for individual commodities and sectors, towards total farm area-based payments for retaining land in good agricultural and environmental condition (GAEC), and more recently with a greater emphasis on Ecological Focus Areas (EFAs) on farm land. It is likely that the future direction of the CAP will be increasingly towards the support of environmental activities on farm land. This direction of policy travel will result in farmers incurring greater costs (e.g. reduced commodity output and increased costs of environmental delivery) which are therefore likely to reduce the effective ‘subsidy’ provided to farmers from the CAP. Insurance schemes represent a key component of agricultural support in other developed countries (e.g. the USA), with evidence indicating that Government subsidies for such insurance schemes are required (in the order of 50% of insurance premium) in order to encourage sufficient industry take-up, as the real-terms commercial cost of private insurance are prohibitively expensive given the market risks, discouraging farmer participation in purely private market insurance (Glauber, 2012). In the USA, “revenue” based (crop yield x price) insurance has proved more effective (with respect to take up by farmers) than “production” (yield) based programmes alone, and within this, farmers prefer revenue based schemes based upon individual farm yields rather than average state yields. Arguments against insurance schemes include the large delivery costs of the programmes (47%; Glauber, 2012) and the moral hazard introduced by the schemes that encourage actions that increase the chance of loss occurring, relative to production in the absence of insurance (Glauber, 2012). However, given the inherent nature of variability in agricultural production within the context of climate change (increased weather extremes) and the price inelastic nature of the demand for food, variability in 302 of 373

Rural Business Research — Written Evidence agricultural market prices is likely to increase in the future. Insurance schemes, supported by a combination of industry (farmers) and government funding should arguably represent a component of future agricultural policy. In order to support this policy development, independent data on farm performance, accepted by all parties, will be of crucial importance. References Alston, J. M., Andersen, M. A., James, J. S., & Pardey, P. G. (2011). The economic returns to US public agricultural research. American Journal of Agricultural Economics, 1-21. http://ajae.oxfordjournals.org/content/early/2011/08/23/ajae.aar044.full.pdf+html Defra (2015a) Farm Business Income by type of farm in England, 2014/15. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/471952/f bs-businessincome-statsnotice-29oct15.pdf Defra (2015b) Total factor productivity of the UK agricultural industry 2014 – 2nd estimate https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/480028/a griproductivity-statsnotice-26nov15.pdf Glauber, J. W. (2013). The growth of the federal crop insurance program, 1990–2011. American Journal of Agricultural Economics, 95(2), 482-488. http://ajae.oxfordjournals.org/content/95/2/482.short Glithero, N.J, Wilson, P. and Ramsden, S.J. (2013). Prospects for arable farm uptake of Short Rotation Coppice willow and miscanthus in England, Applied Energy, 107, 209-218. http://dx.doi.org/10.1016/j.apenergy.2013.02.032 Rural Business Research (2013). Intelligence from the Regions – October 2013. http://www.fbspartnership.co.uk/index.php?id=1530 Rural Business Research (2014a). Intelligence from the Regions – April 2014. http://www.fbspartnership.co.uk/documents/Intelligence_Report_April_2014.pdf Rural Business Research (2014b). Intelligence from the Regions – October 2014. http://www.fbspartnership.co.uk/documents/Intelligence_Report_October_%202014.p df Rural Business Research (2015). Intelligence from the Regions – April 2015. http://www.fbspartnership.co.uk/documents/Intelligence_Report_April_%202015.pdf Thirtle, C, Lin L, Holding, J, Jenkins, L and Piesse, J (2004). Explaining the decline in UK agricultural productivity growth, Journal of Agricultural Economics, 55, 343-366. http://onlinelibrary.wiley.com/doi/10.1111/j.1477-9552.2004.tb00100.x/abstract Wilson, P. (2011). Determinants of the Farm Gate Price of Milk: Quantifying the Impact of Milk Contract and Selling Arrangements, Journal of Farm Management, 14 (3), 211-230. http://www.ingentaconnect.com/content/iagrm/jfm/2011/00000014/00000003/art00003 Wilson, P. (2014). Farmer Characteristics Associated with Improved and High Farm Business Performance, International Journal of Agricultural Management 3(4), 191-199. doi:10.5836/ijam/2014-04-02 Wilson, P. Glithero, N.J., Ramsden, S.J. (2014a). Prospects for Dedicated Energy Crop Production and Attitudes towards Agricultural Straw Use: The Case of Livestock Farmers. Energy Policy 74, 101-110. doi:10.1016/j.enpol.2014.07.009 Wilson, P., Hadley, D. and Asby, C. (2001). The Influence of Management Characteristics on the Technical Efficiency of Wheat Farmers in Eastern England, Agricultural Economics, 24 (3), 329-338. http://dx.doi.org/10.1016/S0169-5150(00)00076-1 Wilson, P., Hadley, D, Ramsden, S. and Kaltsas, I. (1998). Measuring and Explaining Technical Efficiency in UK Potato Production. Journal of Agricultural Economics, 49 (3), 294-305. DOI: 10.1111/j.1477-9552.1998.tb01273.x http://onlinelibrary.wiley.com/doi/10.1111/j.1477-9552.1998.tb01273.x/pdf 303 of 373

Rural Business Research — Written Evidence Wilson, P. Lewis, M and Ackroyd, J. (2014b). Farm Business Innovation, Cooperation and Performance Report submitted to DEFRA Farm Business Economics Division, August 2014. Available at http://www.ruralbusinessresearch.co.uk/ Wilson, P and Ramsden S (2014). Improving farm business performance using Farm Business Survey on-line. REF Impact Case Study. http://impact.ref.ac.uk/CaseStudies/CaseStudy.aspx?Id=28725 18 December 2015

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Stable Insurance — Written Evidence

Stable Insurance — Written Evidence Executive Summary UK agriculture is experiencing unprecedented volatility in farm gate prices as we become more exposed to global market forces. This volatility significantly impacts levels of investment, confidence and dissuades a younger generation from entering the sector. Despite widespread attention from the industry and politicians no viable, sustainable and market-led solution has been put forward other than outline ideas for a (dairy) futures market that may be created at European level. ‘Stable’, is the result of 2 years of study into a simple and affordable volatility solution already used by farmers in North America & Canada and was founded by a Nuffield Farming Scholar. The producer owned initiative, is preparing for launch in 2017. Stable uses Price Insurance as a simple risk management tool that enables farmers to secure a ‘floor price’ for a set period of time. A Livestock Price Protection (LRP) approach mirrors a simple ‘Put’ option, but has notable advantages over its more complex financial alternative: 

Accessible for family sized farms. 1 cow or 1 lamb could be insured for 6 months, for example.

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Simple to understand: Farmer simply chooses the floor price they need (often break even) and the policy length that suits their own business model.

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Producer owned: Any new initiative, however useful will face substantial inertia. Stable is producer-owned, to insure it is built for, trusted and owned by farmers.

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Premiums are calculated using quantitative (Quant) analysis on existing markets like FOREX, (GBP vs. €) combined with AHDB prices and BCMS supply side data.

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Producers pay premiums in advance, with indemnities paid in a week.

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Producers insure against a fall in the National/Regional Average Price, not the price received for their own produce.

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Producers do not need to sell the cattle/sheep etc. at the end of the policy.

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If the market stays above the ‘floor price’ at the end of the policy, then the premium is lost.



UK Government could mirror the USDA policy and subsidise (or match fund) the insurance premiums up to a set annual limit, beginning with an industry trial that could be operational in 12 months.



UK Banks are a major beneficiary of more stable agricultural returns, so could subsidise/support the initiative, education and industry adoption.

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Stable Insurance — Written Evidence 

AHDB have a key role. They have the independent price data required for a Price Insurance initiative and a mandate to support and educate producers to increase profitability and decrease risk.

1.Introduction The wider agricultural industry is united in its response to the current threats posed by price volatility and that it should be considered the ‘new norm’ for the foreseeable future. “Export refunds are no longer used. Intervention, where it exists, is at minimal level. So we need to find other ways to manage price volatility. Everyone knows that a boom and bust rollercoaster ride is the worst environment for long-term planning and investment” . NFU Conference April 2015 – President Meurig Raymond “Commodity price volatility is something which we think will become a part of the normal course of events going forward... there is a critical need to remain focused on risk management ” Allan Wilkinson, Head of Agriculture, HSBC (May 2015) “Farmers should look at financial tools and trading methods to help ride out volatility...we are going to see a lot more price volatility in some sectors. I completely support any financial instruments that can be developed to help dairy farmers in particular to manage that risk.” George Eustice, Parliamentary Under-Secretary of State for DEFRA 2. The Response Whilst farmgate price volatility has everyone’s attention currently, it’s shed a revealing light on just how ill equipped UK family farms are to respond to this new commercial reality. At the same time, a coherent, genuinely useful and fully costed government response is complicated to enact when global market forces are at play. Whilst a number of business risk mitigation tools are currently available to farmers, (diversification etc.) the Stable initiative is focused on creating a simple, affordable and market-led solution, owned by producers. Research began in 2013, by asking one simple question: Are current financial instruments like ‘Futures and Options’ truly useful, or could a more relevant solution be created that would offer a simpler, more affordable and therefore more useful tool to protect British family farms from price volatility? Despite representing the historical ‘backbone’ of futures and options trading, current trading platforms have become out of reach, in terms of cost and complexity, to the average UK farmer. Volatility is a growing problem that affects the whole industry, yet current financialbased offerings are aimed at arable-based agribusiness and not British family farms who are most exposed. After addressing the initial suitability of current financial products, the Stable team then researched what other financial tools could be used to deliver more predictable prices. After much research, a solution that originated in North America/Canada came to the fore. USA and Canadian producers have benefited from Livestock Risk Protection (LRP), and Livestock Gross Margin (LGM) insurance for over 5 years. These two products emerged

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Stable Insurance — Written Evidence from the multi-billion dollar crop insurance industry and offer a popular and accessible tool to increase price stability for producers. LRP enables a floor price (Livestock) (p/kg) to be insured against for a set number of weeks LGM enables the gross margin (Dairy) to be insured and covers both input costs such as oil/grain as well as price received. Both products use national averages, (e.g. UK wide p/kg) rather than the price received or paid by the individual farmers themselves. 3. How Premiums are calculated Life of the policy – normally the longer the policy, the greater the chance of the market price fluctuating and potentially being below the insured price. As a result, in most cases the longer the policy is for, the higher the premium will be. Market volatility – If at the time the policy is being sold, the specific market is highly volatile, the premium to participate will be higher. If the market is relatively stable the premium should be less expensive. Coverage price – By selecting a higher coverage price i.e. 95%, there is a greater chance the policy will produce a benefit. Similarly, selecting a lower coverage price means there is less chance the policy will produce a benefit. The premium will be reflective of the coverage selected as higher coverage will produce a higher premium and lower coverage will produce a lower premium. In the USA the United States Department of Agriculture (USDA) subsidises the premiums by circa 13%. 4. How Insurer (Stable) Risk is managed Stable has already developed the initial algorithms and quantitative (Quant) analysis to support the risk management process that would be required to operate. Quant analysis enables a backstop to be created in related futures markets and 3rd party data (oil/wheat/currency/BCMS data) for the insurance organisation itself. It does this by analysing correlating data and taking positions in existing markets to limit the risk of a deficit occurring. It should also be noted in Canada and USA, a liability limit is set and Government also backs the insurance organisation for maximum protection. This quantitative approach, takes away the need for a futures market to be created at a European level, that is highly likely to fail (even if eventually established) due to illiquidity. 5. Producer Owned To gain market traction, trust and longevity, Stable has been designed to be a profit making but producer owned organisation, modeled like Mole Valley Farmers, a large cooperative based in Devon. 6. International Case Study Example The Canadian company ‘Sask Crop Insurance’ has recently announced (May 2015) the results of its first full year of operations with livestock price insurance in the marketplace. 307 of 373

Stable Insurance — Written Evidence The market demand stated is very encouraging for the first year of operations. 1755 farmers have signed up, with 15% of all calves and 8% of all ‘store’ cattle, now insured in the state. Although still at early stages, it does clearly highlight the potential demand for a market-led British stability solution. WLPIP 2014-15 Results (April 1, 2014-March 31, 2015) 

Number of producers signed up to participate in WLPIP – 1,755



Number of calves insured during spring 2014 – 123,000 or 15 per cent of the marketable calf crop.



Number of feeder cattle insured – 58,000 or eight per cent of the feeder cattle in the province.



Number of fed cattle insured – 850 or one per cent of the fed cattle in the province

An extract from Dr. Keith Collins NCIS report on the take up by USA producers. (Oct 2014) $1bn of livestock/dairy output is now insured in the US. (LRP & LGM) 7. Conclusion Government and the wider industry are united in the understanding of the threat posed by price volatility. The problem will be with us for the ‘foreseeable future’ according to HSBC’s Head of Agriculture amongst others. Any sustainable and viable response to the impact of global market forces has to be marketled to be sustainable and Producer owned to gain traction. Current financial tools (futures) are not affordable or simple enough to be understood and used by family sized farms that most need them.

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Stable Insurance — Written Evidence LRP and LGM insurance offers a flexible, affordable and proven alternative where international case studies can be used to shortcut our response as an industry and increase the probability of success. Stable is a producer-led and owned initiative that could be piloted in 12 months time. Any government support for the initiative could be limited, fully costed and transparent. Its innovative approach, focused on family farms could deliver a quantifiable difference to struggling producers in a short timeframe. UK agricultural banks have almost as much to gain as the producers. They could and should play a big part in the delivery and adoption of the Stable initiative. AHDB have a key role to play in providing access to independent pricing data and as a source of education for farmers discovering Price Insurance for the first time. 6 January 2016

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Nick Tapp — Written Evidence

Nick Tapp — Written Evidence Assumptions - comments: 'Ever-increasing' demand for agricultural is not a given. Population growth is slowing, and is less important now as a driver of demand growth. More important is the impact if increasing income, which sees consumption both increase in total calories consumed per head (China +25% since 1990), and in the switch to calories consumed as animal protein, meat and milk, with the concomitant demands for increased animal feed stuffs. As populations age and become wealthier still, demand growth slows. The change to protein is made early in income growth, and does not continue with further income growth. Demand growth can be expected to continue in the short to medium term but not forever. Demand for and consumption of agricultural products has consistently grown at ca. 1.5% to 2% for the past 60 years and more. Grain consumption has more than tripled in the period, and meat quadrupled. For very nearly all of that time supply has comfortably kept pace with demand growth, mostly through increasing crop and livestock yield, rather than the use of additional land. Price volatility has returned to the market place recently after a prolonged period of relative stability. And high prices are a great incentive to farmers to go out and find ways to produce more. There is very little 'new' land to farm, so future food supply growth has to come from the existing, and occasionally locally shrinking, land base. Land which might be farmed, but is not tends to be disadvantaged - it is very remote from consumers, or it is subject to substantial political interference or conflict. It is worth noting that most farmers around the world do NOT produce the output possible from the land they farm. In all countries there is a distribution of performance, with a small minority performing well, and the rest lagging. The reasons behind this are complex and variable, but almost all are the result of one, or often more, political inadequacies in the local situation. These range from poor regulation (the average yield of potatoes in Kenya is less than one sixth of the potential, due principally to the lack of a regulatory regime to oblige the production of virus free seed), to absence of secure and enforceable property rights (it is difficult and expensive to provide the base capital for farming, if the only security for that capital is the crop itself). In Europe and North America the subsidy system puts in place a range of perverse incentives, resulting in unintended outcomes, which then can lead to further refinements to address these outcomes (the industry can be expected to benefit from innovation and change; the subsidy system embeds the status quo, and slows the move of farming down the generations; to address this lack of generational mobility, the EU have added incentives to younger farmers, rather than remove the incentives for immobility). Politicians tend to seek technical solutions to feed the world. Most of the available technical solutions are not being used by the great majority of farmers. The most impactful solutions are political, but are rarely, if ever, considered. Price volatility is but one factor facing the industry, and is better viewed as part of the wider picture, rather than in isolation.

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Nick Tapp — Written Evidence Questions Q1. Commodity price volatility is normal in functioning markets, where there is a constant and slowly growing global demand, and a supply that is variable, often affected by factors outside the control of the producer. Approximately thirty years of very low volatility to 2007 was the result of political support for production, which allowed farmers in much of the developed world to ignore market signals and continue producing. The inevitable result was that farmers responded to the price security and built excessive stocks (wine lakes, butter mountains), which have become (correctly) politically unacceptable. One solution to volatility is to turn the clock back and revert to a policy of price support to build excess stocks once more; low and relatively stable prices would return; probably not wise. With "situation normal" being periods of price volatility, which are only market signals telling farmers that there is too much or too little of something, and thus encouraging them to produce more or less, the question posed should be around increasing industry resilience in periods of low prices. But industry resilience is best served by allowing evolution and change, which includes farm units getting larger (that is happening anyway, but much less slowly than ought to be the case), some farmers going out of business (again already happening, but often much too slowly to allow resilience to build), and even some land being taken out of farming all together (not welcomed by the individual farmer/landowner affected, but why should the taxpayer support wholly uneconomic or uncompetitive businesses on the least productive land?). Q2. Public policy responses should absolutely focus on the industry as a whole. Support for individual sectors, or worse still, the individual unit is wholly retrograde, ignores the need for change to deliver resilience, and works solely to embed vested interests at every level, many of which are effectively competing for the same resources, and thus result in mutually incompatible and incoherent policies. Q3. There are relatively few tools available to farmers seeking to manage price risk in the UK. Futures markets for forward sales. These are available for the major grains, usually managed indirectly by grain merchants on behalf of farmers. They allow farmers to sell forward at a fixed or optional price, and secure a margin. Farmers tend to use these sparingly, and thus fail to take advantage of what is available. And, as big market moves are usually weather related, often difficult to predict well ahead, a well-managed forward sale to fix a price can look, with the benefit of hindsight, like a poor decision, if the market then moves up strongly. Fixed price contracts. These tend to be increasingly available for minor and specialist crops, where the end user needs to have relative certainty of supply. Food retailers and manufacturers do not welcome volatility, and are looking for ways to secure at least a portion of their supply with their growers. There are some very strong long term relationships, but they cannot solve every problem for every farmer. Cost plus contracts. These have become normal in the dairy industry, as retailers seek to secure their supply and respond to vocal political pressure. Somewhere in this relationship

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Nick Tapp — Written Evidence is an incentive for farm efficiency, as the price is determined by the cost of production of the average of the group. However, fixing a relationship between cost of prodction and price again removes market signals. The result is, particularly in times of low prices, that those who enjoy the benefit of ‘cost plus’ contracts continue to produce, regardless of the underlyong demand and market, while those without such a contract, are relatively, and eventually absolutley disadvantaged. “Cost-plus” is a double edged sword. Being cost competitive. Prices, often driven by global events a long way from the farm gate, are rarely in the control of the farmer. Price volatility is very visible and should be no surprise, nor should it be the primary management focus in most cases. The most effective way of managing the risks that flow from volatility is to be cost competitive at the low end of the cycle. Disappointingly, few farmers know their unit cost of production, or use the tools available to allow them to measure this, and then, most importantly, to manage their costs so as to be increasigly competitive. Q4. Most agricultural products are globally traded commodities. Not all will travel or compete globally, due to perishability, but there is considerable merit in the trade in food stuffs being grown where there is relative climatic advantage - it reduces the overall environmental impact of farming. Q5. The role of policy makers should be to be cautious, and avoid short term policy responses, which are merely seeking to address problems which have their origins in other policies. Q6. There are already a range of tools available to farmers to manage price volatility. The absence of such tools in a number of sectors tends to be the result of a lack of local market scale. Derivative markets, essential for effective price risk management, need to have sufficient scale, and that includes non-market participants often derided as speculators, to have the liquidity necessary to operate efficiently. Sub-scale markets can result in users trapped in positions from which the cost of exit undermines the original price hedge. Financial players in derivative markets for farm commodities are regularly blamed for price volatility, and politicians seek to limit their role in the market. They are essential for these markets. Improvements in the operation of these markets come from transparency and visibility of net trading positions. Public policy makers should be working to make these markets more effective and transparent, rather than seeking to limit their role. Q7. Agriculture is a capital hungry industry, exposed to a number of risks beyond the control of the farmer - weather, price and, for some, particularly livestock farmers, input costs. Access to capital is constrained, or is expensive, or often both, in situations where there is insufficient security to accommodate fluctuating returns. Traditional (and simple) debt is not well suited to fund agriculture in the absence of additional security - the debt obligation is fixed and being funded from variable income. This position is not made any easier, if farmers do not understand their costs of production, and worse still where the providers of capital do not understand the industry (which is increasingly the case).

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Nick Tapp — Written Evidence Investment capital to agriculture has come predominantly from three sources - private equity, bank debt and government subsidy (although this latter source tends to flow straight through the farm and into the pockets of the supply chain and landowner). There is a growing interest from wider sources of investment capital in both farmland and operational farming (very different assets and risks). This capital flow is impeded in many countries by a mix of, usually, xenophobic regulations restricting land ownership, and a significant lack of capital market experience in an industry, which is extraordinarily heterogeneous and local in nature. Farmland is a high quality appreciating asset, well suited to institutional and more varied ownership, and to the provision of capital through a range of more flexible equity and debt models. What is absent in most countries are flexible, forward looking relationship structures between capital (usually land) and the farmer. The landlord-tenant model is an accident of history, with modest alignment, particularly when tenancies are very short; share-farming and other revenue sharing models create risk around the long term health of the underlying farmland asset. Structural innovation is rare. Q8. European farmers are in receipt of substantial taxpayer monies. Is there a causal link between receipt of cash from the State and, for some, to fail to run their farms using modern basic business tools? In countries, where subsidy regimes have been removed, farming businesses are obliged to be commercially focussed, and make sure that they have, and use, all the tools available. Q9. Innovation is essential. However, innovation in agriculture tends to focus on technical innovation, and rarely looks at legal structures, political constraints, tax structures (often just embedding the status quo, and rarely forward looking). Legal, tax and political changes involve politicians in challenging vested interests; technical innovation can be delegated to scientists. Transforming agricultural practice and the uptake of technical innovation is always going to be more straight forward, if the political, legal and commercial structures present sensible incentives. Q10. The CAP gives European farmers one huge competitive advantage in managing price risk - a proportion of their income is unrelated to price, arriving as a subsidy payment. Adding the management of price volatility to the objectives of the CAP is likely to increase the number of perverse incentives, rather than deliver a useful long term solution. Q11. Business resilience on farm will be enhanced if the industry is allowed to evolve in line with changing demands from the market place. The current policy is one of delaying the pace of change, with the result that inefficiency is rewarded, and technical innovation can be ignored. Income insurance schemes in the US, supported by the taxpayer, have been well received by the insurance industry. They are comparatively recent, but appear to have taken some of the risk away from the farm, not just in relation to price volatility, but also to physical output. However, to secure the level of cover offered, they are a substantial costs to the

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Nick Tapp — Written Evidence taxpayer, and some of the market signals to the farmer have been reomved. There is a considerable risk of unintended consequences. 14 December 2015

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Teagasc – Agriculture and Food Development Authority, Ireland — Written Evidence

Teagasc – Agriculture and Food Development Authority, Ireland — Written Evidence 1. How are farmers to mitigate the on-farm effects of volatile global commodity markets and currency fluctuations? A number of courses of action are available to farmers to mitigate the on-farm effects of volatility. First, farmers may engage in the age-old strategy of product diversification, thereby limiting their exposure to any particular commodity market. The weakness of this strategy is that it is likely to lead to a less efficient and productive agri-food sector as research has shown that more specialised farmers are more efficient. Second, farmers and farm households can diversify their income base, by taking up off-farm employment a farmer can reduce the volatility of their total household income. Again such a development may lead to less efficient farms. Third, farmers can set capital aside for a “rainy-day fund” to subsidise the farm operation in times of low output prices, production problems or high input costs. The weakness of this strategy is that in the long-term it depresses farm investment and in turn farm productivity. Finally, farmers may engage in vertical integration. This may take many forms. For example, farmers may enter a co-operative for the purchase of inputs and/or the sale of outputs. This may limit their risk exposure somewhat. They may vertically integrate further by entering fixed price/fixed delivery contracts thereby limiting their exposure to risk. The disadvantage of this strategy is that farmers must limit both their upside and downside risk and therefore must forego profits at times of high prices. Evidence from Ireland has shown that farmers tend to abandon fixed price contracts after a two or three consecutive high price years, Thorne (2015). 2. The role for co-operatives in mitigating the impact of price volatility. There is quite a strong culture and history of co-operatives in Ireland especially in the dairy sector. Over 90 percent of the milk produced in Ireland is processed by co-operative owned and operated companies. Co-operatives give farmers the opportunity to purchase their inputs in bulk with other farmer/members. Furthermore, co-operatives, which are run by farmer director boards, typically come under pressure to use capital to pay out higher prices when the markets are weak and to then re-build capital when prices recover. This was the situation with the dairy crisis of 2015, when co-operative in Ireland typically paid a milk price of almost 1 cent over what the market was returning, Donnellan and Hennessy (2015). Such a strategy does have negative implications, however. A review of the dairy processing sector in Ireland concluded that there was a problem of under investment in research and development partly due to the pressure to pay “the highest possible price” rather than to invest in long-term developments, Prospectus Report (2003). 3. What is the role of public policy in mitigating the impact of potential price volatility? Is there a need for management of price risk to be an explicit objective of the Common Agricultural Policy? The recent consecutive reforms of the Common Agricultural Policy (CAP) have increased farmers’ exposure to price risk. Specific policies aimed at managing price risk are unlikely to become a central part of the future CAP due to WTO disciplines, “Stabilising prices domestically means shifting this instability to world markets. As a result, WTO disciplines limit the actions that an individual country can take to stabilise prices for its own farmers in the interests of creating a global public good – a more stable world market – for all its member countries”, Matthews (2013). However, the significant level of funding available 315 of 373

Teagasc – Agriculture and Food Development Authority, Ireland — Written Evidence under Pillar I of the CAP and paid in the form of the Basic Payment Scheme continues to act as a major buffer to the impact of price risk. These payments are a risk-free source of income for farmers and often contribute a substantial portion of total farm income, especially in periods of low commodity prices. The most recent reform of the CAP did include a risk management tool kit aimed more at mitigating the impact rather than managing price volatility. The risk management tool kit included the establishment of a milk market observatory to provide more detailed information to farmers and industry representative on price developments and thus allowing them to enter into private risk management arrangements in a more informed manner. Provisions were also made to create a crisis reserve fund. Monies are now siphoned off the Pillar I fund and held in reserve for periods of extreme income volatility. However, the experience to date is that this crisis reserve fund has not been used. Even when requests were made to use this fund, it proved difficult to secure agreement to take monies from a large number of farmers to reward a small cohort. The most recent reform has also given Member States the option to establish an income stabilisation mutual fund, however, few have chosen to do so thus demonstrating the limited interest in such tools or the perceived complexities in operating such tools successfully. 4. What role for Member State governments in managing risk? The domestic taxation system can be used as an income stabilisation tool by allowing farmers to smooth their tax burden over a number of consecutive years as opposed to each year individually. Ireland introduced such a taxation system in 2014 allowing farmers to spread their tax liability over 5 years. Some dairy farmers availed of this facility during the recent boom and bust in milk prices. Domestic taxation policies can also be used to incentivise “alternative farm models” that can be used to manage exposure to risk. For example in Ireland tax incentives are available for farmers to come together to form a legally binding partnership. Partnerships can limit risk exposure through diversification, synergies, reduced need for borrowings etc. Domestic taxation policy in Ireland has also recently incentivised long-term leasing of land. Land owners can avail of measures allowing for generous tax free rental income if a 5 or 10 year lease is agreed. This reduces the tenant’s exposure to risk by providing security of tenure and of rental prices. 5. What role is there for the European Investment bank to support on-farm investment at a low cost? What other instruments could improve access to finance in a volatile environment? For many small farmers facing risk, price or production risk, access to short-term credit and particularly merchant credit is the most pressing issue. The European Investment bank is unlikely to be of use to such farmers. For the European Investment bank to be effective, it is essential that it is accessible to both small and large farmers and that the application process is tractable for all. More farmer-friendly repayment agreements with the general retail banking sector could be of use to farmers. Agreements that would allow farmers to take a fixed term “holiday” from their repayments should commodity prices fall below, or input prices rise above, a pre-determined level would be very beneficial to the farming community. 6. Should insurance schemes play a more prominent role? Insurance can play a role in mitigating the impact of production risk such as, extreme weather, pests, disease and personal hazards. The normal problems that plague insurance markets are more pronounced for agricultural production risk. Problems such as asymmetric information, adverse selection, moral hazard, correlated losses and crowding out by 316 of 373

Teagasc – Agriculture and Food Development Authority, Ireland — Written Evidence government when emergency packages are offered to all and not just those insured all act as barriers for private companies to enter the market as policies could only be offered at prices unaffordable to most farmers. To overcome these issues the US crop insurance programme, which was first initiated in 1930 but was expanded under the Federal Crop Insurance Act of 1980, operates by subsidising premiums for farmers. Conclusions on the effectiveness of the programme are mixed. The US Government Accountability Office (GOA, 2007) identified fraud, waste and claimed that the government payment resulted in excessive rents being paid to insurance companies. From the perspective of effectiveness and budgetary feasibility, Tangermann (2011) suggested a superior course of action for governments would be assistance in the creation of long-term databases on risk, coverage, and indemnities etc. that help in reducing information asymmetries thereby improve the functioning of the private insurance market. 7. What are the barriers to more effective on-farm price risk management, including longer term pricing mechanisms? What level of information is available to farmers to engage with market-based instruments and to consider alternative options for on-farm actions? How might knowledge availability be improved? There are many financial instruments available to farmers to manage price risk such as forward contracts, futures markets, swaps and options. With the exception of forward contracts, which are now offered by many grain merchants and dairy processors, many of the other financial instruments continue to be inaccessible to the “ordinary” farmer. Major education and outreach initiatives are required before such financial tools are likely to become commonplace in European farming. While they are popular in the US, it should be borne in mind that they have a much longer history there and the scale of farming differs substantially from most parts of Europe. Knowing one’s cost of production is one of the most crucial pieces of information a farmer requires before an informed decision on fixed price contracts can be made. Apart from understanding the intricacies of financial markets, many farmers still do not have a deep understanding of their production costs. Without knowing the cost of producing a tonne of grain or a litre of milk it is impossible to make a decision about what is a “good” forward price. Financial management or benchmarking tools can assist farmers in this regard. The latest CAP reform has made funding available for the expansion of the role of the Farm Advisory Service and the establishment of a European Innovation Partnership (EIP) for “Agriculture Productivity and Sustainability”. Promoting the adoption of financial management tools and creating greater awareness of the potential of financial instruments to manage risk would be a very useful focus of the EIP. 21 December 2015

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Tenant Farmers Association — Written Evidence

Tenant Farmers Association — Written Evidence Introduction The Chief Executive of the Tenant Farmers Association (TFA), George Dunn was pleased to provide oral evidence to the Select Committee as part of this Inquiry on 16 December 2015. During the evidence session, the Select Committee requested that he submit additional information on three matters raised as follows:

(i) The inappropriateness of the provisions introduced by the Deregulation Act 2015 to allow disputes on farm rent reviews in relation to tenancies regulated by the Agricultural Holdings Act 1986 to be resolved by expert determination rather than arbitration. (ii) The need for statutory provisions allowing farm tenants to diversify beyond agriculture. (iii)The TFA’s proposals for changes to taxation and legislation to encourage longer term Farm Business Tenancies. The TFA is pleased to submit this evidence as a supplement to the oral evidence session from George Dunn and would be pleased to provide any further evidence required by the Select Committee. The inappropriateness of the provision introduced by the Deregulation Act 2015 to allow disputes on farm rent reviews in relation to tenancies regulated by the Agricultural Holdings Act 1986 to be resolved by expert determination rather than arbitration. in providing oral evidence to the Select Committee George Dunn explained one way in which managing price volatility differs for the tenanted sector of agriculture was in relation to farm rents and rent reviews. For the most part farm rents are fixed for a period of three years and even when a review is available, frictional costs involved in settling a dispute at arbitration can be prohibitive. It is not unusual for the costs of a fully argued arbitration hearing to be in excess of £40,000. The TFA was therefore pleased that through its work on better regulation, the Government agreed to allow for rents under the Agricultural Holdings Act 1986 to be referred to an expert for determination rather than to arbitration. It was hoped that this option would provide for speedier and more cost-effective dispute resolution procedures when required. The matter was fully considered by the Tenancy Reform Industry Group (TRIG) – a group facilitated by DEFRA and encompassing representative bodies for landlords, tenants and the professions – which provided advice to the Government about how such a provision should be implemented. Sadly, the advice of TRIG was not followed by the Government. TRIG proposed an amendment to section 84 of the Agricultural Holdings Act 1986. That section of the Act provides that all disputes (including those for rent review) are to be determined by arbitration. The amendment proposed by TRIG was as follows: 318 of 373

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Insert at beginning of s.84(1) "Save as provided for by section 84A". Insert at new s.84A to cover Expert Determination. 84A

Determination of Disputes and Matters by Persons acting as Experts

(1) Save as provided in subsection (2) any dispute arising or matter to be settled under this Act or regulations made under this Act or under a tenancy governed by the Act (hereinafter referred to as a “question”) may be determined by a person acting as an expert and a. his determination of the question shall be final and binding on the landlord and tenant and that determination shall have the same force as if it had been agreed between them; and b. subject to any written agreement between the landlord and the tenant his determination as to the liability for the costs of the landlord the tenant and himself in referring the question together with such interest as he may determine to be due on those costs shall also be final and binding on the landlord and the tenant. (2) This section shall not apply to any dispute over the operation of a notice to quit served by one party on the other. TRIG also provided additional wording for the management of the appointment and conduct of the expert which does not need to be repeated here. The provisions, as drafted by TRIG would have provided the parties to a rent review dispute the option of appointing an expert as opposed to an arbitrator if, before the review date, it had not been possible to settle the dispute by negotiation. Instead of this approach, the Government decided to amend the legislation by updating every reference to arbitration within the Agricultural Holdings Act 1986, as well as making changes to Section 84. In relation to rent reviews this involved changes to Section 12. The effect of these changes (and in particular to Subsection 4) is that in order to use expert determination for a rent review the parties have to irrevocably choose expert determination at the time the rent review notice is served (bearing in mind that the rent review notice can be served by either party unilaterally) and the parties also will have to have agreed the appointment of the expert who will determine the appropriate level of rent – all a year before the rent actually has to be determined and before any negotiations begin. The practical impact is that expert determination in relation to rent reviews will be moribund unless the legislation is amended to allow the appointment of an expert at the same time an arbitrator can be appointed, i.e. within sight of the deadline for having to resolve the dispute. It makes no sense that the parties should be forced to agree to lock in to a formal procedure for resolving the dispute, to the extent that an expert is appointed, before even the negotiations take place. The need for statutory provisions allowing farm tenants to diversify beyond agriculture.

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Tenant Farmers Association — Written Evidence In his oral evidence session, George Dunn explained that it was not always possible for tenant farmers to have the flexibility to diversify their income sources as they are required by the terms of the tenancy agreements to use their holdings for agricultural purposes only. Case law (Jewell v McGowan and others, Court of Appeal, 2002) has determined that such user clauses are to be interpreted rigidly and unless landlords have provided written consent to alter them then tenants must abide strictly by the terms. This gives landlords a significant degree of control over the affairs of the tenant which can cause major problems particularly in cases were the parties do not otherwise enjoyed a good relationship or the landlord is keen to obtain vacant possession or at least diminish the tenant security of tenure by seeking a change in the relationship away from a secure tenancy under the Agricultural Holdings Act 1986 to a time-limited tenancy under the Agricultural Tenancies Act 1995. TRIG considered these points between 2003 and 2004 and whilst there was no consensus for changes to the legislation, it did agree a “Code of Good Practice” which DEFRA agreed to back with funding for a non-binding dispute resolution facility. A copy of the code of practice is attached as an annex to this evidence. Sadly, DEFRA withdrew the funding before anyone reached the stage of having a dispute and as the code of practice was non-binding there is been no appetite since that time for anyone to consider pushing a matter to dispute resolution. The TFA considers that it would be appropriate to look at this again. With the need for farmers to ensure that they have a diversified income base to manage volatility and have greater resilience, tenant farmers should not be left in a position of not be able to take advantage of the same opportunities as their owner-occupier counterparts. The TFA’s proposals for changes to taxation and legislation to encourage longer term Farm Business Tenancies. In his oral evidence session, George Dunn highlighted concerns over short term tenancies as a reason to suggest that some farm tenants, specifically those letting land under the Agricultural Tenancies Act 1995, are more vulnerable to price volatility. Farming is a longterm endeavour requiring significant capital investment, patience, good soil management and the ability to balance profitable years against the bad. None of this is assisted by the short lengths of term offered on today’s FBTs. Over the 20 years of the legislation the length of term on an FBT has, give or take a few months either way, averaged just under four years. With the extent of volatility in agricultural markets seen over the past 10 years, a mark of a resilient farm industry should be long-term security, long enough to manage volatility. The TFA argues that there is market failure with landlords reluctant to use anything like the full extent of the flexibility of the 1995 Act but have gained considerably from it and its associated tax changes. With much higher demand than supply, landlords can offer shortterms, for high rents at very little risk and obtain, into the bargain, 100% Agricultural Property Relief from Inheritance Tax. By contrast the short-term nature of tenancies is holding back progression, investment and sustainable land use. The TFA argues for both fiscal and legislative changes to correct this market failure. It is on the fiscal side where the TFA believes we are likely to see the biggest impact for a relatively small number of changes. The following ideas are in active discussion between the TFA and the Treasury:

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  

Restricting the generous, 100% relief from Inheritance Tax (currently available since 1995 to all landlords regardless of the length of time for which they are prepared to let land) only to those prepared to let for 10 years or more. Clamping down on those land owners who are using share farming, contract farming, share partnerships and grazing licences as thin veneers of trading activity as vehicles for aggressive tax avoidance since in practice they take no risk, have no entrepreneurial input and lack any management control. Offering landlords prepared to let land for 10 years or more the ability to declare their income as if it was trading income for taxation purposes. Reforming Stamp Duty Land Tax to end the discrimination against longer tenancies. Requiring landlords over whom the Government has influence (for example The Crown Estate) to default to using 10 year plus farm tenancies.

The TFA is also aware that some landlords, particularly institutions, are nervous about letting for long periods of time given the difficulties that can occur when attempting to bring a tenancy to an end when the tenant is in breach, chiefly for non-payment of rent. The TFA would be prepared to see easier to use provisions for handling breaches inserted into the legislation in circumstances where landlords let for 10 years or more. Equally, where landlords obtain opportunities for development, the TFA would be happy to see easier to use provisions in longer tenancies for landlords to break tenancies subject to tenants being adequately compensated for their loss. Conclusion The TFA hopes that this supplementary evidence covers the additional points required by the Select Committee but should any further clarification or additional evidence be required, the TFA will be pleased to provide it. 21 December 2015

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Tenant Farmers Association, and National Federation of Young Farmers’ Clubs — Oral Evidence (QQ 24–28)

Tenant Farmers Association, and National Federation of Young Farmers’ Clubs — Oral Evidence (QQ 24–28) Transcript can be found under National Federation of Young Farmers’ Clubs, and Tenant Farmers Association — Oral Evidence (QQ 24–28)

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UK Government — Oral Evidence (QQ 74–83)

UK Government — Oral Evidence (QQ 74–83)

WEDNESDAY 10 FEBRUARY 2016 11 am Witnesses: George Eustice MP, Ian Mitchell and Tim Mordan

Members present Baroness Scott of Needham Market (Chairman) Lord Bowness Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Krebs Lord Rooker Lord Selkirk of Douglas Lord Trees Viscount Ullswater ________________ Examination of Witness George Eustice MP, Minister for Farming, Food and Marine Environment, Defra, Ian Mitchell, Deputy Director for International and Strategy Analysis, Defra, and Tim Mordan, Deputy Director, Farming Productivity, Defra

Q74 The Chairman: Good morning, Minister. Thank you very much indeed for coming to talk to us today. You know that we have been carrying out an inquiry into volatility in agricultural produce prices and the impact on farmers. We are looking at domestic, European and, indeed, global solutions to this. We are pretty much at the end of our work now. We have learnt a lot in the last few months so this is a really good opportunity to talk to you about how you see some of these questions. It is a formal evidence session, which means that a full note will be taken, put on the public record in printed form and on the parliamentary website. We will send you a copy of the transcript, which you will be able to revise to see if there are any errors. We are on the record, being webcast live and accessible via the parliamentary website in due course. You

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UK Government — Oral Evidence (QQ 74–83) will have received copies of Committee Members’ interests. I would ask all Members to declare any relevant interests the first time that they speak. I will kick off with a general question about your observations on agricultural price volatility. Do you think it is a problem that is getting worse or is it something that has always been with us? Specifically, is there any role at all for government, either at European or at UK level, in dealing with the price volatility itself? I do not mean the causes or the effects but the price itself. George Eustice MP: First of all, I welcome the fact that the Committee is looking at this. This is an incredibly topical issue and it is right that it is given attention in this way. To answer your question, the first thing I would say is that there has always been volatility in world agricultural markets. There are a number of reasons for that. First, supply is very prone to disruption through weather. If you get severe weather events, you can get major effects on crops. That has always been the case. Secondly, there is quite low elasticity on many farm and food products, so that even when prices change you do not get the changes in demand. That tends to exaggerate the swings. A third factor is that there is often a lag between responding to market signals. If the dairy price goes up, by the time you have expanded your herd and built the new dairy and done all that, you just about peak your production in time for the price to go down. Equally, when you are trying to curtail production, there is a long lead time on that. In addition to that, there are a number of other factors that have probably exacerbated it at a European level. That is a tradition with the CAP, the old-style 1980s interventions and the like, and quota systems. It tended to buffer the European Union, not entirely but to some extent, against these swings in world markets. The removal of those quota systems has meant that Europe is more exposed to those global swings in commodity prices than it is accustomed to. On your final point about whether there is a role for government, we definitely oppose going back to the old-style interventions, which are distorting to the market. In an era where we have global trade and where we are competing globally, it is the wrong way to go. We are definitely interested in whether government could help foster the development of alternative measures such as futures markets, in particular, to help mitigate the risks of price volatility and create options there for businesses to manage their own risks. There has always been a futures market, for instance, in many of the cereal sectors. I think we are particularly keen to encourage one that would be a success in dairy at the moment.

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UK Government — Oral Evidence (QQ 74–83) The Chairman: That is very helpful; thank you. We will go into those in a lot more detail, as you can imagine, because they are the crux of the inquiry. Q75 Viscount Hanworth: I would like to ask about access to finance and the availability and the use of financial instruments. There has been a joint initiative between the European Investment Bank and the European Union’s DG AGRI—Directorate-General for Agriculture—to allow farmers greater access to cheaper loans and financial instruments through the European Union’s member states’ rural development programmes. Are the UK Government planning to make use of these sorts of opportunities? If not, why not? George Eustice MP: The short answer is yes. We have had the discussion on this already with Commissioner Hogan. He is quite keen to promote these approaches using the European Investment Bank as the vehicle to make loans, basically under the rural development programme and using the rural development programme funds. My colleagues may correct me if I am wrong, but I think that Spain has already either made such a successful application, or is in the advanced stages of doing so, for one of its sectors. We are exploring in particular whether it would be possible to access those funds through the European Investment Bank to make available loan finance to build additional processing capacity for the dairy sector. Looking for instance at the north-west, where there have been lots of challenges for dairy farmers in that area, we see that they have suffered particularly low prices. But they have a lot going for them. It is a big milk field; it is quite a low intensity, low-cost system of production. We believe that, if we could support the development of processing capacity there to help add value, then we could help to secure the future of those dairy farmers in that very important part of the world. Viscount Hanworth: Would you actively encourage the uptake of these loans, or would you adopt a more laissez-faire attitude and allow the industry itself to develop an interest? George Eustice MP: We have piloted things like this previously. For instance, I know that in Cornwall they used the Objective 1 European money through something called the fresh start initiative to pilot soft loans for new entrants coming in, to try to support and encourage new entrants. I am also aware that the Welsh Government have a similar new entrants scheme that they have used. These are quite modest, small steps forward, but we have already piloted it. The reality is that, if you are making available loan finance on quite generous terms, you probably would not have to promote it very hard. I am sure there would be quite a few takers.

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UK Government — Oral Evidence (QQ 74–83) Q76 Viscount Hanworth: I move on to financial instruments, which are not used very commonly in the UK. Do the Government support the development of financial instruments, such as forward contracts and options and so on and so forth? There is a much greater use of these instruments, for example, in the United States. What about developments in the UK? George Eustice MP: Yes. I am very keen to support the development of futures markets in particular. The US used to have a more regulated dairy market, for instance, than it does now. The evidence there is that, once they got rid of all the production quotas, a futures market naturally developed of its own accord. Typically, what a lot of dairy farmers in the US do is perhaps fix the price, using a futures market, get a forward contract price for around 40% of their production and then take their chances on the open market for the remaining 60%. Although that does not remove the volatility altogether, it certainly buffers them against it. We have a team working in Defra at the moment to try to do the thinking on how we could replicate the type of futures market here in London that currently runs in Chicago on dairy products. We have a great opportunity. London is the world’s financial centre and we do lots of futures and commodities already. It would be the right place to have such a market. We are doing the thinking now on the barriers that we would need to remove to enable that to take place. Viscount Hanworth: I was about to come on to the question of why these have been so delayed. We have this huge financial sector and yet it has not produced very many instruments that are relevant to our agricultural sector. What is the impediment? George Eustice MP: We have successful futures markets in some sectors, notably cereals. Conventionally, these have been anchored against the physical delivery of a forward contract. That is what they have operated on and that has been the basis. The difficulty with dairy is that liquid milk is a perishable product. If you were going to anchor it against a physical market, it would need to be one probably in skimmed milk powder, which is what has happened in some areas in the US, or indeed anchored against something like cheese or butter. It is harder to make these work because there is less demand for those types of forward contracts in those dairy sectors than there is in cereals. Our conclusion so far is that probably the best chance of making a futures market work is to have one that is cashsettled, so effectively a derivative market that tracks an index on dairy prices. You would necessarily remove the need for a physical delivery of a forward contract. To make that work, you need very reliable market data in which the markets will have confidence and

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UK Government — Oral Evidence (QQ 74–83) faith. In Chicago, for instance, where they have a cash-settled dairy futures market, they have a regulatory requirement for their dairy producers to publish their sales prices and they make that available in an anonymised but collective form so that they have very accurate and regular data on what is actually going on in the market. The AHDB does something similar. They collect the price being paid by the dairy companies to farmers and that is published regularly, but that is not quite the same as getting to the bottom of what is really happening in the market, which is the price that the dairy companies themselves are getting for the product they sell. We need to look at this whole area of what data needs to be made available in order to facilitate a cash-settled futures market in which the market speculators and market makers would have confidence. Viscount Hanworth: Am I right in thinking that there is a highly developed futures market in the US for meat, carcasses and so on, and a complete absence of such in the UK? George Eustice MP: I do not know whether Ian knows. Traditionally, there was the pork bellies market. I believe there is a poultry market in the US, as well. There is one in poultry meat, so there is definitely a precedent for having these futures markets in other sectors. Q77 Lord Selkirk of Douglas: I have three questions, but if the answer to the first question is no, then the second and third drop off. George Eustice MP: And I get off lightly. Lord Selkirk of Douglas: My first question is this. There has been a clear shift to insurance mechanisms supporting agriculture elsewhere in the world in the place of direct support. Do you see a role for publicly funded insurance schemes as part of EU or member state policies? George Eustice MP: The European Union did a study looking at this in around 2007 or 2008 and concluded that there could be some mileage in that. They have made provision in Pillar 2 of the existing CAP proposal for member states to take forward some of those options, but it is a very modest offering, which probably is not sufficiently big to make the difference. Looking forward to longer-term CAP reform, we have always had the view that the single farm payment should be a transitional type of support. We do not see that as being a sensible long-term policy: to just arbitrarily pay people depending on the area of land they have. If the objective of a future agricultural policy had, as one of its themes, mitigating risk in order to promote food security and help those farmers and growers who are putting their

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UK Government — Oral Evidence (QQ 74–83) money on the line and taking the chance with the weather to grow things, having those types of insurance schemes is certainly something I would be keen to look at. They are complex. The US has one, which is very complex and looks at different incomes, state by state, crop by crop. It makes it a very difficult scheme to manage administratively. Most people would agree that the Canadian model is probably the simplest, where they simply target a sharp fall in farm incomes and basically take that as a proxy for something going wrong in the sector, either with price or indeed with crops. I would be very interested in the next round of CAP reform to look at whether we can learn lessons from places like Canada, but maybe design a system that is simpler still and actually helps to mitigate risk. Lord Selkirk of Douglas: Arising out of what you have just said, would it be possible for your department to let us have a little note on the practicality of putting forward a scheme roughly along the lines that you have mentioned and how it would be done? That might be very helpful. George Eustice MP: That is right. I should stress that our current focus is very much on simplifying the existing CAP. Most of the team are on that. We have started doing some very early thinking about CAP post-2020 and what a wider reform might look like, but we can certainly make available to you the challenge as we see it from those countries. Lord Selkirk of Douglas: I will ask my last two questions in view of what you have said. If public income and revenue insurance schemes were to be used at all in the EU, what sort of risks should they cover? Should publicly funded insurance schemes cover single commodities or take a whole-farm approach? George Eustice MP: There would be pros and cons to either approach. In the Canadian approach, they are effectively taking a whole-farm approach because they are targeting sharp falls in farm income. If it falls by a substantial percentage compared with the average in the previous years, then they have a top-up payment. The disadvantage of that is that it can be quite market-distorting. If you have some farmers who are less efficient and not as well managed, you are removing that market signal. The trouble with all these, including the US one, is that it can dampen people’s response to market signals and you do not really want to encourage that. The challenge will be to set it in a way that provides some protection but not total protection, because you want people to read market signals and, if the right thing to do is to stop growing potatoes, then you want people to stop growing potatoes. The advantage of targeting something like crop failure is that you are targeting an actual genuine event that has happened—a bad weather event that has destroyed a crop. It would

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UK Government — Oral Evidence (QQ 74–83) be much more in line with the conventional approach to insurance, but it can get quite complicated in agriculture. You have to get this trade-off between having something that is very simple but may still distort the market, and something that would be more desirable but is more complex to deliver. The Chairman: Could you clarify for me right now what sort of procedures and measures are available to your department to deal with natural disasters? We seem to have flooding somewhere now on an annual basis. What tools do you have? George Eustice MP: My colleague Tim might add some detail, but there is provision within the Pillar 2 rural development programme for emergency crisis measures. Two years ago, with the Somerset floods, we set up a farm recovery fund to make available grant funding effectively to help farmers get back on their feet. We did the same, for instance, out of the fisheries fund for fishermen who had lost all sorts of static net gear. We have a new farm recovery fund to help farmers in Cumbria at the moment. We can turn it around quite quickly and we have quite a bit of flexibility on how we design those. It is basically making available capital grants to repair hedges, tracks, walls and that kind of thing. The Chairman: Is that all under Pillar 2, or is some of that UK budget? George Eustice MP: I think that is all under Pillar 2, but all of Pillar 2 also requires some matched funding. Tim Mordan: In the 2014 Somerset Levels flooding, we used RDP money and we set aside £10 million, of which about half was used. There was a long tail, obviously, because farmers needed to know what they needed to repair sometime after the flooding. On the flooding in the north-west over Christmas, that was also RDP funding, so that was out of Pillar 2 money. The claim period for that is ongoing and does not close until the summer. The Chairman: That is very helpful; thank you. Lord Trees: Good morning, Minister. This is secondary to the question on insurance. The information we have about the American system particularly is that to kick-start it, but possibly in a more sustained way, it requires a fairly high degree of public subsidy. Is that something that your Government could envisage? In other respects, if you felt that insurance for a variety of contingencies had a place, could that subsidy be envisaged from your Government or through the EU system? George Eustice MP: I should say that at the moment we are doing early work on scoping different options. The Government have not yet reached a final negotiating position for the CAP post-2020. Certainly in principle, yes. If one of the objectives of an agricultural policy at

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UK Government — Oral Evidence (QQ 74–83) the European level is to help to safeguard food security—and one of the threats to food security is risks such as the weather—then, in principle, it is something that could be considered. I should stress one of the difficulties of the insurance scheme and one of the things that would certainly cause some nervousness with the Treasury. With the CAP, for all its faults, we know what it is going to cost. We know how many hectares of land there are and how much we are going to pay per hectare. The slightly difficult thing with an insurance scheme is that you would not want it to be an open-ended blank cheque because you would not really know the costs. From memory, the EU study that was done on this suggested that over the long term an insurance-type scheme as opposed to the single farm payment might be significantly cheaper, but of course there would be quite a lot of variation year to year. Tim Mordan: I would add a couple of points. The US model is one that is often cited and is one we are looking at very closely. There are two important aspects. One is that in the US model it is instead of direct payments and not alongside. Obviously, that is a relevant factor. The other one is something that the Minister mentioned earlier about having the data available on which to make the right decisions. In America, and indeed in the Canadian model, they have a wealth of data, which we do not have. We would need to be careful about the extra burden not only on government, or whoever is administering it, but on farmers in having to fill in more forms to enable this to happen. They are two things that we are looking at. Lord Selkirk of Douglas: I will ask a question about the data. One of the points made to us by the witness from Europe was that guidance is given to Governments but not directly to farmers. Is there a role for government research that would directly assist farmers? It seems that there is perhaps a bigger role for research to play. What is your thinking on that? George Eustice MP: Are you talking in the context of a futures market or in the context of insurance? Lord Selkirk of Douglas: I am talking in terms of what will work best. I am asking a question; I am not expressing a view. George Eustice MP: Coming back to my earlier point on the futures market in particular, you have to have really reliable data to which you index any derivative market. One of the things people sometimes say is that it is fanciful to think that dairy farmers are going to go into some futures market and hedge some future exposure. I think that is probably true. However, I would say that in that sort of sector there is a real role for the dairy processors to offer fixed contracts to farmers and then hedge their own exposure in a futures market.

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UK Government — Oral Evidence (QQ 74–83) These are the people who are large enough and could employ the Treasury experts to go into the financial markets and hedge their risk. My view is that to make this work in practice rather than just in theory, particularly in dairy, you would need to have the buy-in, the support and the enthusiasm of those dairy processors because they would have the wherewithal to accurately hedge their risk. The Chairman: You have raised some really interesting points. I come from East Anglia, and, clearly, large cereal farmers are very engaged with this. They understand it. But it is very difficult to see how small farmers, at an individual farm unit level, could engage with something as complex as that without significant help. Viscount Hanworth: Dealing with the issue of insurance, in the US I think the federal support is for the insurance premiums and therefore the budgetary commitment is presumably quite predictable. You have implied that if we were to adopt an insurance scheme it would imply a variable and hazardous budgetary commitment. How do you explain that? George Eustice MP: If you were simply buying, as you say, the premium on the insurance, that would give you some consistency, except insurance companies do not like losing in the long run. If you had an increased frequency of bad weather events, the premium would go up. The other issue is that there would have to be a judgment call made around whether it was more cost effective to pay the premiums on, say, a private insurance regime being offered, or whether some kind of government-backed mutual fund would be a more costeffective means. Sometimes the difficulty is in insuring risks where there are regular calls on that insurance. Farming is famously a very risky thing to do because none of us can control the weather, and crops are particularly exposed. Sometimes, the cost that an insurance company will put on underwriting that risk is very high. Just as we have seen with the things we have tried to do in flooding—the Flood Re scheme—sometimes some kind of government-backed mutual is a more cost-effective way of doing these things. If you are doing the latter route, you would definitely have a lot of variability. Viscount Hanworth: Our insurance industry would not be particularly amenable then to these developments. That is what you are implying, I think. George Eustice MP: I do not know. We have not really got to the stage of having that discussion with them. In principle, if something like this is working in the US, then it could work here. The big argument against what they are doing in the US is that it is incredibly bureaucratic and administrative. We are in the business of trying to get away from an

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UK Government — Oral Evidence (QQ 74–83) incredibly bureaucratic and heavily administrative CAP in Europe. We would like to move to something simpler and more logical. Viscount Hanworth: So the US model is not a good model. George Eustice MP: I do not think it is. I think the Canadian model is the closest we have got to an insurance scheme that works, just because of the complexity of the US model. The Chairman: The Committee has just received a briefing document about the American system that made us yearn for the simplicity of the CAP. Q78 Viscount Ullswater: I should say that I am a trustee of an estate in Cumbria that receives basic farm payments. We have talked quite a bit about what is available under the CAP with Pillar 1 and Pillar 2; and Pillar 2 allows this risk management toolkit. Not many countries within the EU have taken up that side of it. Certainly, in England, it has not been done very much at all. If we look forward and see more money coming from Pillar 1 into Pillar 2—if that is the trend and the drift—is more use going to be made of it for things like insurance premiums and income stabilisation schemes as well as the environmental programmes? George Eustice MP: We took the view—this was my predecessors before I became a Minister—and I think rightly, that we had lots of calls on Pillar 2. We do very good agrienvironment schemes, for instance. We wanted to offer grants to help farmers improve their competitiveness. There are calls on what is actually a very small fund in the grand scheme of things. In the CAP it is only a small percentage of the total. A much higher percentage—around 80%—is in Pillar 1, so that is where all the funds are. The conclusion was that, if you were going to do an insurance scheme, you would need to do it properly and it would cost quite a bit of money. It is the kind of thing you would have to do in Pillar 1 as an alternative to the single farm payment approach. That is where it would sit. The problem with what they have tried to do in Pillar 2 is that it is so small and limited that, if you tried to take it up, you would have complexity but you would still be whistling in the wind, frankly, and not making much impact in the way you would need to with an insurance scheme. It is the kind of thing that, if you did it, would be a bold reform of the CAP and a bold change from what we currently have in the CAP. It is the kind of thing that would be best done in Pillar 1. With an already complicated CAP and lots of other things we wanted to do with Pillar 2, we took the decision not to take these options forward. Q79 Lord Bowness: We have had differing evidence about the role that direct payments under Pillar 1 play in bolstering agricultural resilience. Some people have said the guaranteed

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UK Government — Oral Evidence (QQ 74–83) income protects farmers from market volatility; others argue it is a disincentive to innovation and forward-thinking. What is your view? George Eustice MP: My view is that they are both right, which might sound counterintuitive. Bluntly, there is no getting away from the fact that, if you have a fixed amount of income coming in at £X per hectare that you are farming under your control, that is going to be a buffer. It means that in good years you will have huge profits and probably have to buy lots and lots of machinery to take advantage of capital allowances to make sure you do not get a huge tax bill, but in very bad years it will help minimise your losses and buffer you against things going wrong. It is quite a blunt instrument for that. It helps buffer farm income. There is no getting away from that fact, but it is quite a blunt way of doing it. Equally, there is the fact that it is probably a barrier to innovation. It means that some farmers, who probably ought to think about retiring, stay there, whereas they ought to be making way for a new entrant in some cases. It prevents farmers from thinking about how they add value to their products and how they can become more competitive and reduce their costs. It stops some of that innovation. Lord Bowness: So you would not be supportive of an initiative that New Zealand has talked about, which is stopping subsidies overnight. George Eustice MP: In the case of New Zealand, you always have to bear in mind that their agricultural exports were such a huge part of their total exports that, at the same time as abolishing all subsidies, they devalued the New Zealand dollar by around 40% in a very short space of time. They took a decision to scrap all subsidies but priced their products back into world markets through a very substantial devaluation. Whether that would happen in a European context is a moot point. I do not think you can make direct correlations with New Zealand, but what we cannot get away from is that it is now a very vibrant and efficient industry that competes around the world. The Chairman: Presumably, in any analysis of an insurance scheme, whether it was an American or Canadian style, versus direct payments, this question would still arise about how you offer some basic protections without fossilising inefficient practice. That is an issue whichever model of intervention you look at. George Eustice MP: It is. The reality is that, although there are WTO rules that set parameters, they are quite generous parameters so they give you the scope to run these types of schemes. It is not an easy balance to get right, but the key thing would be to have a scheme that helps mitigate risk so that farmers have the confidence to spend hundreds of

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UK Government — Oral Evidence (QQ 74–83) thousands of pounds on plants or livestock in order to try to make money, knowing that there will be a bit of a safety net if something goes wrong, while not insulating them against market signals. Certainly if you talk to people like Fonterra in New Zealand, they are very critical of the US system, which they believe insulates US farmers from the market to the extent that they do not follow the market signal. That can then perpetuate low prices for a longer period of time. The Chairman: I guess their size helps. The size of the American market exacerbates it. That is fascinating. George Eustice MP: That is right. Q80 Lord Rooker: I want to take you back to a question when Lord Bowness asked you about New Zealand. Have you been briefed on our session with the high commissioner from New Zealand three weeks ago at all? George Eustice MP: No, but I know the high commissioner. I have met him several times and we have talked about this issue. Lord Rooker: We had some information from the EU a week before. There was a comment about New Zealand: “Oh well, they chopped the subsidies but they subsidise the banks”. It turned out not to be quite correct in that sense. There were schemes put together for the overnight announcement about the loss of subsidies. He gave us figures about the absolutely staggering increases in productivity in a range of what you might call agricultural products. At the end of the day, the direct consequence was that they lost 1% of farmers, who were pushed out because they went to a market-driven system. They could ease out the 1%. The land was still there and presumably got used. It is a good story. I remember seeing in December that one of our farming periodicals did a big supplement about the effect on farms in New Zealand. I think you admitted in one of our earlier questions that, if they do not get the market signals, they will not move. There is no better way of getting the market signals than by being in the market without feather-bedding. Would it be a general principle that the market should decide whether a farm carries on farming as it is today, or changes ownership, produce or other ways of running the business because it is a business? George Eustice MP: Yes. I know that a number of you are former Ministers, and CAP reform has been with us probably ever since we have been in the EU. The truth is that it has changed, in that the interventions we have now with the CAP are less market-distorting, in that we have got rid of most coupled payments and the vast majority of intervention price

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UK Government — Oral Evidence (QQ 74–83) work has also gone. We are now talking about the single farm payment, which is less distorting. You can argue that it distorts land prices, but it is less distorting on agricultural commodities. I think there has been progress. Fundamentally, you are right. We do not make any secret of the fact that the existence of the single farm payment helps to buffer farmers against management decisions they would otherwise take if that support was not there. Coming back to New Zealand, there are two things I would say. I do not know the circumstances of whether or not they subsidised the banks instead, but it is undeniable that there was a sharp depreciation in their currency that helped them price themselves back into world markets and gave farmers effectively a higher price, but with the removal of subsidies. In some areas, New Zealand also has a different approach from us on issues such as animal welfare. We have higher regulatory standards on animal welfare than has New Zealand, for instance. We would want to try to safeguard that. We have a manifesto commitment to ensure that in the next round of CAP reform there is greater prominence given to issues such as animal welfare. It would not be quite as simple, in my view, as just following what New Zealand did, but that is not to say that there are not important lessons we could learn. Lord Rooker: I take your general point. One of the other things we have had raised with us—both New Zealand and someone else raised this—is the fact that there is a system of balancing out the good years and the bad years in terms of a five-year scheme, so that volatility becomes less of a burden. The New Zealand high commissioner said that volatility should be our friend because it encourages innovation. You have indicated that people would go out and spend money on capital equipment. They may not get the full return on their capital equipment but they see the need to spend the money. Perhaps they could park the money in the good year under taxation arrangements so that they are not penalised and draw down in a year where the weather is bad or there was volatility in the markets. Those examples work elsewhere in the world; I cannot remember where we were given another example other than New Zealand, but there was somewhere where there was a five-year balancing arrangement. George Eustice MP: It is Australia. Australia is often the case mentioned. Indeed, the CLA and others have made this case for a similar type of scheme, which we explored with the Treasury. The cause of it was not helped when the CLA created the term “a farmer’s ISA”. They started to make it sound like it was some kind of pension pot rather than a genuine

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UK Government — Oral Evidence (QQ 74–83) risk management tool. At that point, enthusiasm for the concept dwindled quite quickly because they did not want another kind of complex thing that would be seen effectively as a retirement tool. What we have done—and it delivers the same outcome—is allow tax averaging over five years for farm enterprises. It was previously under two years. We have now brought ourselves into line with what the Irish do, which is to allow tax averaging over a longer period of time. If you get a very good year, then you can average that tax against any bad years that you have had previously. Tim Mordan: That is from April. Lord Rooker: Do you have any policies or systems at the present time that positively seek to drive farmers out of farming because they cannot cope, are inefficient or not making good use of the land, to allow new entrants in? I have put it in a harsh way, but I mean to encourage them to retire. Are there any positive drives in the department at the present time in that respect? George Eustice MP: Nothing as proactive as you might have in mind. The one point I would make is that we have seen a very difficult two years for farmers. In fact, over the last 20 years, there has been a lot of consolidation already in terms of losing numbers of farmers, particularly in dairy. We are at the point where our dairy production is actually up from 20 years ago but the number of dairy farmers has gone down substantially. Lord Rooker: It is 50%. George Eustice MP: There is consolidation ongoing. Some of the things we have had discussion with others about, but it is at very early stages, are that, if you have a farmer who is in his 70s—you do get these cases—and on an Agricultural Holdings Act 1986-type tenancy, who finds it too much of a wrench to retire because they have their livestock, the farm and it is their home as well as their farm, it is quite a difficult thing to persuade them that it is time to step back and retire to create an opportunity for a new entrant. We have had some discussions on whether you could have mechanisms that enable people to retire with dignity, as it were, and maybe stay on the farm but make it possible to allow a new property to be built for a new farmer coming in and taking it on. We are keen to encourage such things as contract farming and shared farming agreements, which offer an opportunity for somebody to step back from the day-to-day running of the business while keeping an interest in it and staying in their home. We are seeing the development of some models that enable this transfer to take place.

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UK Government — Oral Evidence (QQ 74–83) We have our food and farming plan that we are working on now. One of the themes we will be looking at is whether there is more that we can do to encourage contractual models that create opportunities for new entrants coming in—so it is not just a career choice for someone who has inherited a farm down the generations, but somebody who wants to come in and set up their own enterprise—but, equally, to make that work effectively you need to help people leave at the other end. Lord Krebs: I would like the Minister to follow up briefly on Lord Rooker’s question about exposure to the market and innovation. Earlier on in your comments, you alluded to the dairy industry in the north-west and investment in creating added value out of milk. Of course, that is not a new story. I have heard that story talked about for at least 25 years and probably longer, but it does not seem as though a lot has happened. What is going to make it happen right now? George Eustice MP: We have supported projects like this in the past. Rural development funding was used to help build the new factory at Davidstow in Cornwall for Dairy Crest. It is now a world leader in cheddar cheese and is selling around the world. That is something that government helped support through the rural development programme. There are some quite thoughtful, innovative, forward-thinking farmers in Cumbria who are keen to try to develop some new processing capacity. They are in touch with us and we are exploring this option of whether we could use an EIB-backed scheme to help build processing capacity. The Government cannot dictate these things by decree; if they did, it would not work. That is the nature of things. However, if you have a group of talented individuals who are going to take control of their own destiny, pull things together and make things work—you always need people with the verve to do these things and make it work— and if we can support them with grant funding or funding through the EIB, we will certainly do our bit to ensure we can. Lord Krebs: So it is a cultural issue as well as a financial issue. George Eustice MP: It is. The Government can only create the circumstances where enterprises can flourish. Ultimately, every business needs a talented individual who knows what they are doing and has the determination to succeed. The Chairman: Colleagues, we have 20 minutes left and three important areas of questioning. I will have to ask you to be fairly succinct in your questioning, please. Q81 Lord Trees: My question is around research and knowledge sharing, and I suppose competitiveness, which we have touched on. I will narrow them down to two specifics.

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UK Government — Oral Evidence (QQ 74–83) Rapid-speed broadband is a constant problem that comes up in rural areas. What are the Government doing to encourage and deliver that? That is obviously a key to knowledge transfer. In terms of competitiveness, we have heard that knowing the cost of production is something that the horticultural, pig and poultry sectors are pretty good at on average, but a much smaller proportion of the enterprise in the red meat sector, and to some extent dairy, know their cost of production, which is key to their competitiveness. What role do you think Government have in encouraging that more business-like approach, that knowledgesharing and basically improving the competitiveness of those enterprises? George Eustice MP: On that latter point, there is a very important point here for the AHDB, the levy body that is there to support farming, to commission research and development work and to encourage knowledge transfer. They have a very important role to play. They do regular statistics and benchmarking to try to help farmers recognise where they are and what they could do to improve their productivity. There is definitely a role for them there. Coming back to the point we made earlier around the impact of CAP and subsidies—it is a long history—it is worth noting that the sectors that tend to be in better shape today and more progressive are the ones that never had any support. Horticulture and soft fruit are very innovative and have seen an expansion. The poultry and pig industries tend to be where you have better technical excellence, and there is no getting away from that. The AHDB has a very important role to play in assisting that knowledge transfer. Coming back to what I said earlier about different types of models around contract farming, I am very interested in the role that there could be for a slightly more integrated model. I will give you a couple of examples. Tulip, which is a Danish company but responsible for about 10% of UK pig production, runs a model that it calls franchise farming, where it owns the livestock and the unit but has individual entrepreneurs running those units. That means it is able to bring in some talented new people who know what they are doing. It also means it can share its knowledge. It shares all its work on genetics with its own members, and all its work, research and development on feeding regimes with its own farmers. McCain’s has a similar model. It has 300 potato farmers around the country. It does work on genetics in potatoes, and licenses that work just to its own growers. It can do machinery-sharing projects around those 300 growers, who tend to be clustered in regions. I think that if you can get a more integrated model, using the strength of some of the larger processors at the

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UK Government — Oral Evidence (QQ 74–83) top, you can accelerate knowledge transfer. You can fix a lot of the problems that are inherent in having a very fragmented primary sector. Broadband is a challenge. BDUK is up and running. The aim is to get 95% of people on highspeed broadband by the end of this year or 2017. We have also introduced a voucher system so that those who cannot get broadband are able to get cheap and ready access to satellite broadband, which is a solution for some. Of course, we have put on the table around £10 million to pilot other solutions, whether mobile or fibre to the property in some cases or wireless for the final kilometre or so. There are lots of different technologies there and we are keen to pilot all of them to make sure we can get full penetration of high-speed broadband. Q82 Lord Cunningham of Felling: The Secretary of State has announced a bold 25-year strategy paper for British agriculture to include, we understand, a strengthening of the British brand and exports, attract investment to industry, boost skills, increase productivity, innovation, research and development and data-sharing. Sensibly, it does not include motherhood and apple pie, but it seems to include almost everything else. When will it be published? George Eustice MP: We are working on it now. I would anticipate that it will be published in the spring, so possibly during March or April. That is the most likely timescale. We have held a number of different meetings with different sectors to get the input of different stakeholders. I have been encouraged by the enthusiasm with which the industry has embraced it. Lord Cunningham of Felling: It is bound to be welcomed, one would have thought, across the industry as a whole. I do not suppose the Committee could see in advance what it has to say about risk in agriculture. George Eustice MP: The point I would make is that this will be a high-level document. I doubt whether it will go into the granular detail that you seek on these specific tools, but we have a team of people working on the futures market idea in particular, as I said. We have already identified that we will probably need a cash-settled market and we are looking at the lessons from Chicago. We are thinking about what kind of regulatory regime we might need to get the data published. We are more than happy to share the current state of our thinking on that with you because that does go into quite granular detail. Lord Cunningham of Felling: That would be exceedingly helpful and beneficial to our report, I am sure, Minister. Thank you for that. I want to ask you some brief questions

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UK Government — Oral Evidence (QQ 74–83) specifically about precision farming. We do not seem to be as involved in precision farming as many of our global competitors like Australia, the United States or even Scandinavian countries. Is there a reason for that, or maybe more than one reason? George Eustice MP: I am not sure that is a fair criticism. One of the great resources we have in this country is world-beating science. We have some excellent science going on at places like John Innes and universities like Harper Adams, and places like Rothamsted as well. We obviously have the agritech strategy, and through that we are supporting a number of centres of excellence. I launched one at Rothamsted at the end of last year, which was looking at how we improve our understanding of data and develop computer models that can make sense of data that is otherwise often confusing. We are now in the process of putting the final touches to designating three others, one of which will look at crops, pest and disease. Another will look at livestock. The third one is precisely on precision farming, so it will be a centre of excellence that tries to take forward our research. Lord Cunningham of Felling: Forgive me, I am not criticising what the department is doing. I was more concerned about the apparent failure of British agriculture to take up the opportunities of precision farming. For example, the Parliamentary Office of Science and Technology survey points out that 83% of Australian grain growers use GPS steering. I do not think it is anything like that high in the UK. George Eustice MP: It is a moot point. I guess it probably links back to several of the things we have talked about around the CAP and the disincentive that that can be for modernisation. We are doing it obviously with the agritech strategy. I would also point out that one of the strands of the rural development programme is what we call countryside productivity. A lot of the calls we are doing there is to directly fund pieces of technology that improve our understanding both in livestock and in crops. Lord Cunningham of Felling: Is there any specific way that the department does, or intends to, promote more involvement of precision farming in UK agriculture? George Eustice MP: It is through the countryside productivity strand, which is about £150 million over the next four years. There will be a range of calls there that will be specifically focused on technology that can improve productivity. Lord Cunningham of Felling: Does the department collect data on precision farming in the UK? Tim Mordan: Not that I am aware of. We certainly would not have precise details on how many farmers use GPS. I do not think we have that kind of granularity of data. We know that

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UK Government — Oral Evidence (QQ 74–83) the Agriculture and Horticulture Development Board do quite a lot of work in this space. They are very keen, under the food and farming plan, to take some responsibility and leadership for knowledge exchange, which is exactly the sort of thing we were talking about in trying to get the great technology that we have here into the marketplace. Ian Mitchell: The Farm Practices survey might pick up in general terms on farmers’ use of that sort of technology. The other relevant thing that Defra does is the Earth Observations programme, which is looking to make the best use of satellite imagery in farming and in the environment domain. I am very happy to share more information with you on that. Lord Cunningham of Felling: Precision farming has so many advantages in improving yields and productivity, and even better treatment of the land, for example. Surely this is something, given the thrust of the paper that I hope we are soon going to see, which needs a push. George Eustice MP: It will definitely be a theme of our food and farming plan and there are intended to be action points in this area. Lord Cunningham of Felling: Therefore, data sharing is going to be very important. George Eustice MP: It is. We have taken a lead at the moment in Defra in terms of having a very open approach to data and publishing as many datasets as we can. We have already done a lot of datasets, for instance, from Cefas in the fisheries realm. We want to do more of those because we believe that data can be incredibly powerful. Lord Krebs: Minister, I just wondered whether the 25-year strategy will refer to the impacts of climate change on agriculture generally, and more specifically on price volatility. George Eustice MP: Yes; it will touch on climate change and indeed improving our use of resources such as water, for instance, and reducing our reliance on pesticides. We have been clear throughout—and I know some of the NGOs feel uneasy about this—that while the food and farming plan will absolutely have a context around the environment and will be very clear that it is consistent with the environmental strategy, we have a separate 25-year environment plan that is being worked on by my colleague Rory Stewart. That is the right place to deal with all the environmental issues, including looking at things such as soil, climate change, water resources and everything else. There is a separate environment plan that will lead on these things, but clearly there is an overlap and we have always been very open about that. Q83 Lord Curry of Kirkharle: I declare an interest. I farm in partnership in Northumberland. My other interests are on the record, but I need to record the fact that I

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UK Government — Oral Evidence (QQ 74–83) have worked, and am working, with Defra on the 25-year plan, as part of the consultation process and the agritech strategy to which the Minister has referred. I have two questions—one of which follows Lord Cunningham’s question—on the timescale of the 25-year plan and our own study here. The synergy between our timetable and the 25year plan is helpful. Hopefully, what we might conclude could be of interest to Defra within the 25-year plan; and what you might draft in the plan might duplicate to some extent our own conclusions here. There is a need, if possible, to work as closely together as we can in our own conclusions and how they might be of help to Defra with the 25-year plan. I am not sure what that means in practice, but the principle of that would be worth exploring. I have a question, Minister, first on the 25-year plan and then, secondly, on the future EU reform process. You mentioned the issue of retirement and the need to restructure the agricultural sector, addressing many of the issues that we have already discussed this morning. There are, as you know, initiatives out there to try to help in this respect, where there is a matching service and all those issues. It would be helpful if the 25-year plan were to reinforce the importance of industry initiatives already in place rather than to reinvent wheels, to give them the boost and the recognition that there is an opportunity to move this forward at quite a pace. I will ask the second question at the same time on future reform of the common agricultural policy. I am well aware of your own desire to simplify the whole process and to work with a commissioner who is also minded to try to help in that respect. As far as our programme here is concerned, we have touched on the issue of risk management tools, et cetera, but is there anything else in the CAP reform process and potential negotiations that could be helpful in this whole issue of volatility resilience of the sector? George Eustice MP: On the synergies, you have obviously had some very interesting witnesses giving accounts of what happens in the US. I will make sure that we get that evidence and reflect on it, and take it into account in our own work. As I said to Lord Cunningham, we will share with you some of the more granular detail of the work we have been doing, in particular on the futures markets. I agree that we do not want this just to be a government plan. We are very clear that we want action points for industry as well. We are also clear that we do not want it just to be another strategy that is left to one side and gathers dust. We want there to be action points as well as the start of something and not the end of something.

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UK Government — Oral Evidence (QQ 74–83) On CAP, it is very early days at the moment in terms of the longer-term reform of CAP. There are some arguments that, having just been through a tortuous process, maybe we should not rush the next reform, particularly if it means that things go backwards again; and maybe we should focus on making the reform we have work. There are some voices that say that in some parts of Europe. As I said, the general approach we would take is to move towards much greater simplicity and maybe not get hung up over the whole Pillar 1 and Pillar 2 thing, but just have some thematic objectives of CAP. One would be promoting food security by mitigating risk. That is where there is a big role for some of these tools. One would undoubtedly be on promoting the protection of the environment. We have the model in the countryside stewardship, with all its difficulties at the moment. The general approach we have had to agri-environment over the last 20 years has proved to be quite effective. We would want to continue that type of scheme in some way. Thirdly, as I said, we have made clear in our manifesto that as another objective we think there should be greater recognition given to animal welfare issues. As you improve productivity, have a growing world population and intensify production, you start to get quite ethical issues around how we treat farm animals. If we can find ways of encouraging more animal welfare-friendly farming practices, then we should start to consider that as well. Lord Curry of Kirkharle: I want to press you a bit more on that. Every time we go into CAP reform negotiations, our government approach has been that we need to phase out Pillar 1. This has happened over the last 15 years. Yet we come out of the process with Pillar 1 being perhaps reduced but certainly protected. Bearing in mind the conversation earlier about whether this is good or bad, would it not be helpful to set a timetable in future, if it can be negotiated, saying that Pillar 1 will continue until 2030 or whenever it is, but that after that it will be phased out? Then farmers can begin to adjust to a market economy without that buffer. George Eustice MP: Sometimes, in a European context, if you set a target, it is an excuse for inaction for a period of time rather than an actual target that people stick to. I understand the sentiment behind what you say. The difficulty is that when you have a 28country negotiation, all with different political traditions, different political make-up and different farming structures, coherence is never going to be a strong point of a common agricultural policy. That is not to say that we cannot make progress. I think we have made progress over the last 20 years to reform it, but there is further to go.

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UK Government — Oral Evidence (QQ 74–83) I know that the last Labour Government faced criticism because they went into the negotiations saying that we should get rid of Pillar 1 altogether and just have Pillar 2. There was some criticism at the time by the then Environment Select Committee saying, “You have just isolated yourself and you have had no influence”. Even though that was a different makeup of government from my own, I am not sure that I agree with that. I think your starting principle should be to say what you think the right thing is. If we get into the position where we are too scared to even advocate the right thing because we think it is non-negotiable, I do not think that is a very healthy place for things to end up. I do think it is still right to articulate as a first principle what the right type of agriculture policy is. The Chairman: Minister, thank you very much for being with us today and to your team for supporting you so well. It has been a very enlightening session. We will begin our work of reporting soon and we look forward to having further dialogue with you on that. In the meantime, thank you very much.

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United States Department of Agriculture — Written Evidence

United States Department of Agriculture — Written Evidence 1.

Price Volatility a) Are you concerned about the recent trends in agricultural price volatility? Do you think that the global situation is worsening?

Price volatility has formed a core concern of the farm policy debate in recent years. Some questions remain as to whether price volatility is actually trending upward—evidence suggests that recent volatility has not been as great as in some previous periods. But current concerns about price volatility should be tempered by recent moderation in prices and price movements as grain and oilseed stocks have expanded over the past three years. This moderation and downward movement of prices is in line with long-term trends in real commodity prices, which have fallen more than by more than two-thirds since World War II. This expansion of stocks, which is driven by producer response to expand supplies after years of tighter markets, will help to reduce price volatility and indicates that markets are operating as expected. b) What is the impact of price volatility on the farming sector in the USA? Price volatility can have different impacts, depending on whether prices are rising or falling. Rapidly rising crop prices are not generally seen as a concern for their producers, but can raise concerns through their effects on food prices for consumers and feed prices for livestock producers. Falling crop prices, on the other hand, raise concerns for crop producers, whose costs may not fall as rapidly as prices for the commodities they produce. Falling prices can impact revenues for producers and livestock feeders unable to hedge their risks or who may be forced to market during down cycles of price variability or to buy feed during up cycles. But it also provides marketing opportunities to transfer risk through a range of private risk management tools. The U.S. has extensive availability of private risk management tools, including futures and options contracts as well as forward contracting for local delivery of grain for major commodities offered on commodity exchanges, as well as from local elevators and processors. Producers of these crops can manage any aspect of price by locking in futures prices during an upswing and using options to limit losses or to provide some gains if prices rise suddenly. Conversely, livestock feeders can benefit from relatively low feed prices by hedging during a downswing. Among producers of corn, soybeans, and wheat who use contracting in their operations, around 30 percent participate in hedging their risks through futures contracts and 15 percent through options. These tools are more limited for minor crops and to some extent for livestock. However, some of these producers can also use production and/or marketing contracts with downstream firms as a risk management strategy. More than 40 percent of U.S. production is under some form of production or marketing contract. Many producers also use on-farm storage or marketing through cooperatives to manage price risk. Moreover, many livestock operations also produce crops (and vice versa) – another risk management strategy.

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United States Department of Agriculture — Written Evidence Another way U.S. farm households manage risk is through off-farm income sources, including off-farm jobs, farm-related and non-farm businesses, investment income, and social insurance transfers (e.g., social security). 2.

The US Farm Bill a)

What are the main policy instruments and public funding available for US farmers to help them cope with price volatility and enhance the resilience of their agricultural operations? What are the main differences between your approach and that of the EU?

Agricultural policy in the United States is generally governed by an omnibus legislative package known as the Farm Bill. The Farm Bill amends previous agricultural and related policies and establishes new policies on a 5-year cycle, although that cycle can be longer or shorter depending on legislative priorities. The Agricultural Act of 2014, which we refer to as the 2014 Farm Bill, followed a one-year extension of the previous Farm Bill. This was necessary because of the extended debate surrounding both new farm programs and the associated domestic food assistance programs. It should be noted that out of the approximately $100 billion in annual spending on Farm Bill programs, 80 percent goes to domestic food assistance programs and only 20 percent to farm programs—approximately $50 per cropland acre ($123 per hectare or £85 per hectare). These programs include crop insurance, commodity programs, conservation, and other services that support U.S. agriculture and rural communities. The 2014 farm bill debate took place in a period of high farm prices and record farm incomes, and centered on the replacement of fixed decoupled payments that went to farmers regardless of market conditions. A key element of the farm bill debate was how to target commodity programs to provide a safety-net in time of unexpected distress and better help farmers manage risk. It should be noted that even before the 2014 farm bill, other programs were in place to help farmers manage risk. For example, marketing assistance loans allow producers to defer sales when there is an expectation of rising prices by borrowing at low interest on the value of their harvested commodity. The Federal crop insurance program provides yield and revenue loss policies. Production on approximately 80 percent of cropland acres is covered by some form of Federal crop insurance. To strengthen the farm safety net, the 2014 Farm Bill introduced additional commodity programs: Agriculture Risk Coverage (or ARC), Price Loss Coverage (or PLC), as well as two new shallow loss crop insurance programs: the Supplemental Coverage Option (or SCO) and the Stacked Income Protection Plan (or STAX) for upland cotton. A new margin protection program for dairy producers helps manage risk and replaces the previous market price support program. ARC payments are made when revenue falls below a benchmark level, which is based on a rolling average. PLC payments are made when market prices fall below a set reference price. In both cases, payments are made based on historical acreage and are decoupled from

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United States Department of Agriculture — Written Evidence current production. Payments under these programs for the 2014/15 crop totalled around $5 billion. The U.S. and EU approaches have a number of similarities, including the use of a decoupled, historical base for payments and environmental compliance requirements for participation in domestic farm programs. There are differences, however. The 2014 Farm Bill moves the U.S. towards a countercyclical safety net approach and away from fixed payments that provide transfers to producers even during times of good yields and high incomes. A safety-net approach provides some protection against regular cyclical movements in agricultural markets, but also flexibility to respond to adverse conditions, such as those the EU dairy and livestock sectors industry have experienced with the closure of the Russian market. U.S. producers of major commodities also have access to a variety of private risk management tools—futures and options and forward contracting, as well as the option to purchase crop insurance. These risk management tools may be less available throughout the EU, although we know they are utilized in some of the member states. b)

Can you describe the main policy shifts brought about as a result of the 2014 US Farm Act? How effective have these been?

The main policy shift resulting from the 2014 Farm Bill was an increasing focus on risk management and away from fixed payments that provide support to producers even when they are not experiencing economic stress. The new safety-net approach offers producers a choice of tools to tailor support to address their own needs and the counter-cyclical orientation of safety-net programs keeps domestic support targeted to responding in times of need. While it is early to assess the effectiveness of 2014 Farm Bill programs, steeply declining farm revenue -- U.S. net farm income fell 38 percent from 2014 to 2015 and is projected to fall an additional 3 percent in 2016 -- has provided a strong test of the new safety net. We have seen the targeted response of revenue protection through the ARC program, where counties with higher yields, and thus lower revenue losses, have seen lower or no payments. More than three-quarters of all base acres in the U.S. were enrolled in the ARC revenuebased program. More than half of all dairy producers enrolled at least some of their historical production in the Margin Protection Program, and while most historical production was enrolled at the lowest, and least costly, $4.00 level, all available margin coverages received some enrollment. During 2015, a stable margin close to the $8.00 level kept payments to a limited period and targeted only to operations that had chosen the highest level of risk protection. The new Federal crop insurance programs, SCO and STAX, have shown relatively low uptake. The low level of SCO participation is related to the relatively high participation in the ARC program -- producers electing ARC were not eligible to purchase SCO. Limited participation in STAX may result from a number of factors, including producers’ lack of familiarity with this type of program.

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The Role of Income Support a)

What role did historical direct support to farmers play in the USA? What were the effects of the withdrawal of this direct support?

Prior to the 2014 Farm Bill, U.S. producers received support primarily through fixed direct payments based on historical production. These payments offered a consistent annual payment to producers unrelated to production decisions. The payments could be used for household or farm business expenses, and could be used to invest and save during periods of higher revenues or to help to sustain households or operations during times of lower revenues. At the same time, because the payments were not designed to respond to economic need, they continued during years of record high farm incomes, even as other parts of the economy faced economic recession. Moreover, given that the payments were tied to a land base, at least some share was capitalized into the land values, raising land prices and rental rates. While it is too early to say what the effect will be from moving away from direct payments to the new farm safety-net system, it appears that the programs are working as intended to provide support during economic downturns. b)

We have heard mixed opinions about the role that Direct Payments under the EU’s CAP play in bolstering agricultural resilience. Some argue that a guaranteed income protects farmers from market volatility, whilst other argue that it disincentives innovation and forward-thinking. What are your thoughts?

While it is difficult to comment on conditions in the EU or the effects of the direct payments on EU producers, in the United States, we have seen no evidence of reduced innovation or market-oriented business decisions. Producers have made full use of their flexibility to alter planting according to market signals and good agronomic practices, and they have readily adopted new technologies, including biotechnology and precision and data-driven agriculture. Federal and State-level public spending on food and agricultural research totals approximately $5 billion annually; private sector entities invest an additional $5-6 billion. USDA’s Economic Research Service estimates that for every $1 invested in food and agriculture R&D, $10 in economic benefits results. While private investment is most heavily concentrated in food manufacturing and crop development, public investment is more broadly distributed, with concentrations not only in crop and animal breeding, but also in environment and natural resources and human nutrition and food safety. Federal and State-level spending on knowledge transfer programs, including extension services and technical assistance, also totals around $5 billion annually. The U.S. has maintained a cooperatively funded national, state, and local extension system for transferring the results of research to farmers for 100 years and continues to support the extension system as part of an integrated approach to ensure that innovative research in agriculturerelated sciences and technologies reach the people who can put them into practice. Farmers have access to county, state, and national-level extension and education programs tailored to transferring new knowledge and providing training to working farmers across the full range of research topics pursued in USDA, including agricultural production practices and new technologies; business management and economics; natural resources management, 348 of 373

United States Department of Agriculture — Written Evidence climate change, and conservation; markets and trade; among others. Producers also have direct access to a wide range of publicly available reports, websites, web-based management tools, and advisory services both electronically and through local USDA offices. 4.

The Role of Insurance a)

What experience do you have with insurance programmes to manage the impacts of price volatility?

b)

To what extent are these insurance programmes publically or privately funded and what do they cover?

I serve as Chairman of the Federal Crop Insurance Corporation (FCIC), a public corporation managed by a public-private Board of Directors under the general supervision of the Secretary of Agriculture. FCIC oversees development and provision of crop insurance and risk management products that are sold to producers through private insurance companies. FCIC crop insurance products cover around 120 different crops. In 2014, there were over 1.2 million policies that provided nearly $110 billion in insurance coverage on more than 290 million acres, including more than 80 percent of acres planted to major field crops in the U.S. Federal crop insurance products are available to protect against both yield and revenue losses for crops, including pasture, rangeland, and forage, and to a more limited extent, for livestock. Yield policies protect against agricultural production losses due to unavoidable natural causes such as drought, excessive moisture, hail, wind, hurricane, tornado, lightning, and insects. Revenue policies protect against revenue losses resulting from changes in prices and/or yields. Livestock policies protect either against a loss in gross margin (market value less feed costs) or against price declines. Participation in the Federal crop insurance program by producers is voluntary; however, participation is encouraged through premium subsidies, which vary by coverage level. In 2015, producers paid roughly $3.7 billion in crop insurance premiums and the federal government paid approximately $6 billion in premium subsidies. Indemnities for coverage losses have totalled approximately $5.2 billion so far, [only a little over half the value of premium income]. Crop insurance is delivered to producers through private insurance companies. Companies receive administrative and operating payments to cover costs of program delivery and share in the risk of loss and opportunity for gain under a reinsurance agreement. Private insurers also propose and develop new types of insurance products subject to approval by the FCIC Board. This public-private partnership provides for efficient service by local agents and also fosters innovation in the types of products that the FCIC can offer to producers. c)

What feedback do you get from farmers regarding the insurance options available to them? Are they sufficient to help manage risk?

There is widespread acceptance of the current crop insurance programs by the majority of U.S. producers. USDA meets regularly with stakeholders to identify the need for new crop insurance products or ways to improve existing products. The 2014 Farm Bill also contained crop insurance provisions that reflect this feedback. In general, these provisions enhance 349 of 373

United States Department of Agriculture — Written Evidence crop insurance by providing more coverage options fora broader range of products, including organics, and by providing more affordable coverage for beginning farmers and ranchers. d)

What are the pros and cons of publically-funded insurance schemes?

Perhaps foremost among the pros of a publically funded U.S. crop insurance program has been its substitution for ad-hoc disaster assistance. For example, since growers pay for a significant share of the cost of their crop insurance coverage, they make planting decisions based on the level of risk they are willing to accept. Producers gain a direct role in managing their risks and participate in pooling risk with other producers by providing net contributions in good years to offset losses in bad years. From a budget perspective, the cost of a crop insurance program is more predictable because it is operated in an actuarially sound manner. Ad-hoc disaster payments are often approved outside the regular budgeting process and can take some time to be implemented. In contrast, producers receive indemnity payments in a timely manner when funds are most needed. Critics point to potential drawbacks to public delivery of crop insurance, including rising program costs and increased risk-taking by producers. Because producers do not pay the full cost, they may make different planting and management choices than would otherwise be the case. In addition, as premiums rise, payments to private insurers for delivery of policy services, which are pegged to premiums, can rise as well, leading to increasing government costs. As commodity prices have softened recently, however, we have seen the federal expenditures on crop insurance fall as well. The President’s budget proposal includes several proposals to help address these criticisms, including a lower subsidy for policies that allow producers to purchase coverage with a harvest price option that results in higher coverage. An important aspect of the U.S. crop insurance program is that the public-private partnership allows for operation of an insurance system based on an actuarially sound premium structure, despite its potential exposure to widespread systemic losses—as seen during the 2012-2013 drought and winter weather disasters. Federal government (or taxpayer) assumption of shared risk and underwriting of delivery costs to private insurers, and assumption of a share of actuarially fair producer premiums, allows for a system of widely shared risk in which producers participate and in which private, locally based agents provide individual risk assessment, producer services, and loss determinations. The appropriate balance between private and public investments in this system is continually being examined and debated by policymakers.

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Recommendations to the EU a)

Which types of risk management measures do you think the EU should be thinking about when revising the CAP for the period after 2020?

b)

In your view, what role should insurance play in the next round of CAP reform?

c)

In your opinion, which types of financial instruments deployed in your country would the EU and its Member States benefit from adopting?

d)

The Committee has received evidence suggesting that the US agricultural model is not relevant for the EU due to different landscapes and institutional arrangements. Do you agree?

Given the differences between the U.S. and EU agricultural sectors and institutional frameworks, it is difficult to say whether U.S. policy and risk management tools are a good fit for the EU CAP. We can point to the positive benefits of our policies, including our investments in knowledge generation and transfer, and to the value of private risk management tools for producers in the United States as examples that might be considered. We also know that U.S. producers benefit from a science-based regulatory system that fosters innovation and adoption of new technologies that can help producers mitigate yield risk and improve returns to farming while respecting the demands of environmental sustainability. Follow-up questions: 1)

Does the US system come into conflict with WTO rules about support? How is it compatible?

No, U.S. domestic support programs are not in conflict with WTO rules. In recent years, the U.S. has notified support far below our $19.1 billion ceiling for the Aggregate Measurement of Support (AMS). In 2012, the U.S. AMS was $6.9 billion. 2)

Aside from the State/Federal agricultural insurance and support programmes and schemes, how widespread is private insurance? Do lots of farmers use it?

Aside from the Federal Crop Insurance Program, the only form of private agricultural insurance widely available in the U.S. is hail insurance, although some crop insurance companies may offer private policies for freeze damage, price risk, and other perils on a limited basis. Hail damage can be severe, but usually affects only a small area at any one time. Crop hail insurance is used in regions of the U.S. where hail damage occurs relatively frequently and is most often purchased to protect high-yielding crops, where the total destruction of even a part of a planted field can be costly. 3)

Are there different programmes and schemes offered at individual state level as well as Federal level? How much freedom to States enjoy to offer their own support?

Commodity support programs are almost exclusively offered at the Federal level, although they are delivered through a system of State and county offices that serve as the local 351 of 373

United States Department of Agriculture — Written Evidence contact point for producers. States are essentially free to provide support to producers and the agriculture sector, but in general focus on technical assistance and education, research, marketing and promotion of State-produced products, and conservation, farmland preservation, and other environmental programs. 4 March 2016

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United States Department of Agriculture — Oral Evidence (QQ 84-87)

United States Department of Agriculture — Oral Evidence (QQ 8487)

WEDNESDAY 10 FEBRUARY 2016 11 am Witness: Robert Johansson

Members present Baroness Scott of Needham Market (Chairman) Lord Bowness Lord Cunningham of Felling Lord Curry of Kirkharle Viscount Hanworth Lord Krebs Lord Rooker Lord Selkirk of Douglas Lord Trees Viscount Ullswater ________________ Examination of Witness Robert Johansson, Chief Economist, United States Department of Agriculture (via videoconference)

Q84 The Chairman: It is good afternoon here, Mr Johansson, and a very early morning for you. Can you hear me all right? Robert Johansson: Yes, I can hear you fine. Can you hear me, my Lord Chairman? The Chairman: I certainly can. Thank you very much for joining us at what I know is a very early hour for you. As you know, we have been carrying out an inquiry into the whole question of price volatility in agriculture and the ways in which we might build resilience. Your evidence is an important part of what we need to hear to compare systems. This is a formal evidence-taking session of our Committee. A full note will be taken and put on the public record in printed form and on the parliamentary website. We will send you a copy of the transcript, which you can check in case of any errors. We are on the record; we

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United States Department of Agriculture — Oral Evidence (QQ 84-87) are being webcast live and will be accessible via the parliamentary website in due course. You will have received the interests of members of the Committee. They will declare any relevant interests the first time they speak. First, could you say a word or two about who you are and what your role is? I will start with a general question about your observations on recent trends in agricultural price volatility. Do you think that globally the situation is worsening? Could you outline what the impact of price volatility on the farming sector in the United States is currently? Robert Johansson: Thank you for the opportunity to speak with you today. I know that we tried to schedule this several weeks earlier. However, due to unforeseen weather events here in Washington—highlighting your inquiry about volatility—we had disruptions to the US Government from snowfall. In fact, we are anticipating some more snow later today. I am glad that we have been able to make the session work. To start with, I will give you several comments about my background. I will then move right into your question about price volatility. I currently serve as the chief economist here at USDA. I am responsible for providing the Secretary of Agriculture with economic policy advice on US ag issues, including market conditions, trade, domestic support policy and a host of other areas. You may not be aware of this, but we have an office of climate change, an office of cost-benefit analysis and an office of environmental markets. The office of the chief economist plays quite a large role in providing analysis and information to the Secretary on those topics. I have previously held positions in different parts of the US Government. I worked on the US Council of Economic Advisers at the White House. I was at the US Congressional Budget Office for several years. I also worked at the Office of Management and Budget. Prior to that, I received my PhD in agricultural and applied economics at the University of Minnesota. Prior to that, I served as an agricultural extension agent in several central African countries—the Democratic Republic of Congo and Gabon—between 1990 and 1995. I turn to price volatility. As you know, price volatility has formed a core concern of the farm policy debate over recent years, particularly since the 2007-08 price spikes. There is some question as to whether or not recently price volatility has been trending upwards or mitigating. Evidence suggests that volatility has not been as great over the last year or two as it was prior that—say, eight years ago or so. I note that recent concerns about price volatility should be tempered somewhat by recent moderation in prices that we have seen, as grain and oilseed stocks have built up over the last three years, primarily as a result of the

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United States Department of Agriculture — Oral Evidence (QQ 84-87) high prices that we had earlier. As an economist, I would hope that, like most markets, they would move in response to price signals. As I have said, we saw prices move up after 200708 and through the 2011 period. Producers globally responded and brought increased acreage into production. We have had three remarkable record years of harvests for a lot of commodities. As a result, we have seen stockbuilding occur and prices have softened. Putting this in a larger context, we would argue that since World War II—due to productivity, for the most part—we have seen real prices for all agricultural commodities come down fairly consistently. In fact, if we look at some sort of price index since World War II, we would say that real prices have come down by about two-thirds since the 1940s, again as a response to global demand, which has increased during that time. That has pushed producers to produce more efficiently. We have seen that not just in the United States but in other countries. Focusing a little more on how price volatility can be said to affect producers in the United States or the farming sector here in the US, I would say that producers want to mitigate price risk and will do so using a variety of tools, both management tools and financial tools. Your inquiry is focused mainly on the financial tool sector—crop insurance and so on. I will highlight some of the tools that producers have. I know that we will get to crop insurance in a second, so I will hold off on that. To set the stage, rapidly rising crop prices are generally not seen as a real concern for producers. In fact, most producers would argue that they would like to see prices go up. They are more of a concern for consumers and producers who need to buy livestock feeds. Falling crop prices, on the other hand, raise concerns for crop producers, whose costs may not be falling as rapidly as prices are. Falling prices can impact on revenues for producers and livestock feeders unable to hedge their risks, who may be forced to market during down cycles of price variability or to buy feed during up cycles, but they provide marketing opportunities to transfer that risk through a range of private management tools. In the United States, we have extensive availability of private risk management tools, including futures and options contracts and forward contracting for local delivery of grain for major commodities offered on the commodity exchanges, as well as from local elevators and processors. Producers of those crops can manage any aspect of price risk by locking in futures prices during upswings and using options to limit losses or to provide gains, if prices change suddenly. Conversely, livestock feeders can benefit from low feed prices by hedging during downswings.

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United States Department of Agriculture — Oral Evidence (QQ 84-87) We have looked at what percentage of our producers use these private management tools. Research shows that, among producers of corn, soy beans and wheat who use contracting in their operations, about 30% are participating in hedging risk through futures contracts and about 15% hedge through options. Obviously those tools are a bit more limited for minor crops and, to some extent, for livestock categories, but some of those producers also use production and marketing contracts to manage downstream risk. We would say that more than 40% of US production is under some form of production or marketing contract. Many producers also use on-farm storage and marketing through co-operatives to manage their price risk. An additional way in which many farm households manage risk is through off-farm opportunities, including jobs, non-farm businesses and investment income. For a good percentage of our farm households, we see that a large percentage of income comes from off-farm sources, as opposed to on-farm sources. That is another way in which households diversify their income risk. I will stop there. There is more that I can add on that, but I know that you have a number of questions you want to get through. The Chairman: We have. Thank you very much. I remind the Committee that this is only a 30-minute session, so please keep questions fairly snappy. Q85 Lord Cunningham of Felling: Good morning. What are the main policy instruments and public funding available to US farmers to help them to cope with price volatility and to improve their resilience? What are the main differences between the United States approach and that of the European Union? Robert Johansson: You are probably familiar with this, but I will give a small amount of background. Ag policy in the United States is generally governed by what is commonly known as the Farm Bill. The Farm Bill amends previous agriculture and related policies on a five-year cycle, roughly. That cycle can be longer or shorter, depending on legislative priorities and how easy it is to reach agreement in our legislative bodies. The Agricultural Act 2014—the one that we enacted two years ago—which we refer to as the 2014 Farm Bill, followed the previous 2008 Farm Bill, which was extended by an additional year. The additional time was needed due to the debate surrounding both the new farm programmes and the associated food assistance programmes that are part of the Farm Bill. Our Farm Bill comprises roughly US $100 billion a year in annual spending on farm programmes. Of that $100 billion, 80% goes to domestic food assistance programmes and 20% goes to farm programmes, the farm programmes being mainly conservation

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United States Department of Agriculture — Oral Evidence (QQ 84-87) programmes, commodity programmes and crop insurance programmes. All told, the $20 billion a year that is going to the farm sector translates to roughly $50 per cropland acre in farm payments—I am spreading that across all cropland acres—or roughly $123, or £85, per hectare. As I mentioned, these programmes include crop insurance, commodity programmes and conservation. There is additional spending that is part of the 20% that goes to rural development as well. The 2014 Farm Bill debate took place at a period of record high income. They started that debate back in 2011-12, when farm income in the United States was at historic highs. The debate was shaped both by the fact that we were at record high farm incomes and by the fact that Congress was very interested in finding budget savings in all the legislation that it was considering at the time. One component that marks this Farm Bill relative to earlier Farm Bills is a pivot away from direct support. Essentially, there was the thought that we would want to provide a farm safety net for producers who were suffering from adverse or other production conditions that were difficult to cope with. However, the debate at the time centred on direct payments being programmes that provided support during times when farmers were already experiencing record high farm income, so there was a desire to move away from that method to a more countercyclical type of payment. I will get to that in a second. Before the 2014 Farm Bill, other programmes were in place to help farmers to manage risk. There was marketing loan assistance. Those were smaller programmes. By and large, the largest programme will have been the federal crop insurance programme, which provided producers of most major commodities with yield and revenue loss policies. We see that production on approximately 80% of our cropland acres is covered by some form of crop insurance. As I have mentioned, we pivoted away from direct payments to two main programmes that were based on a safety net/risk management objective. The 2014 Farm Bill introduced the agricultural risk coverage programme—or ARC, as it is called—and the price loss coverage programme, or PLC. It also introduced other new forms of crop insurance called the supplemental coverage option and the stacked income protection plan for upland cotton, which are smaller components of the crop insurance programme portfolio. Perhaps we will have time to get into those, but I will cover just the major components right now. In addition, a new margin protection programme for dairy producers was introduced. That

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United States Department of Agriculture — Oral Evidence (QQ 84-87) helps to manage risk and replaced the previous market price support programme for dairy that we had. The ARC programme—the agricultural risk coverage programme—was adopted by a majority of producers. I should point out that at the beginning of the Farm Bill period, in 2014, producers had to decide which programme they wanted to participate in—the ARC programme or the PLC programme. That decision will hold through the life of the Farm Bill, so for five years. ARC payments are made when farm revenue falls below a benchmark level, based on an Olympic average of revenue. PLC payments are made when market prices for a given commodity fall below a set of reference prices. The payments for both ARC and PLC are based on historic acreage that the producer had. For example, even though a producer may receive an ARC payment or a PLC payment for a base acre of corn, soy beans or wheat, that producer does not have to be producing corn, soy beans or wheat to receive that payment. It is decoupled, in that sense, but it is contingent either on what the prevailing revenue is relative to the five-year average or on what the prevailing price is relative to the reference price. In the 2014-15 crop year, which was our first experience with these programmes, we saw that ARC and PLC provided about $5 billion of payments to producers under the programmes. The US and EU approaches have a number of similarities and a number of differences. First, both the US approach and the EU approach rely on the use of a decoupled historic base acre for payment programmes and on environmental compliance requirements for participation. There are differences, however. As I mentioned, the 2014 Farm Bill moves towards a countercyclical type of approach and away from fixed payments, to avoid providing transfers to producers during good times. The safety net provides additional protection during regular cyclical movements and downturns in ag markets. It also provides US producers with some additional flexibility during those adverse conditions, as I have mentioned. As noted, US producers also have access to a variety of private risk management tools: futures, options and so on. Those risk management tools may be more or less available in the EU—I do not know—but I know that some of them are also utilised in EU countries. With that, I will stop and see whether you have any questions—or we can move on. Lord Cunningham of Felling: Do you believe that the principal aims and objectives of the 2014 Farm Bill are being met, given the policy changes you have just talked about? Robert Johansson: Yes. As I mentioned, we do not have a lot of experience with the programmes. We are now in our second year with them. The crop insurance programme

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United States Department of Agriculture — Oral Evidence (QQ 84-87) was strengthened; we can talk about that shortly. For the commodity programmes—ARC and PLC—the intent was twofold: first, to provide a safety net during bad times; and, secondly, to provide savings to the budget. Currently payments under the ARC and PLC programmes are more or less what the levels would have been under the older direct payment programme. There is not a huge amount of difference between them. Producers would argue that right now, with low commodity prices and the strong US dollar, there are adverse economic conditions for producers here in the United States. In that sense, the programmes are providing a safety net. I am sure that you would find some producers who would argue that the safety net should be stronger and other groups who might argue that it should be weaker. Nevertheless, the programmes are functioning right now and are providing payments to producers, as prices have come down substantially in the last couple of years. Looking forward, we will have to wait until the end of the Farm Bill period—an additional three years from now—to evaluate whether the programmes meet their objective. Most producers are enrolled in the ARC programme, which is based on an Olympic five-year average. Right now, the revenue guarantees under ARC are being driven to a large degree by the fact that, within that five-year period, producers had fairly high incomes in 2011, 2012 and 2013. Going forward, as we get closer to 2018, those high-income years will fall out of their ARC revenue guarantee. All else being equal, we would expect overall ARC payments to fall over time, providing the savings that were intended in crafting the programme. That is probably a longer answer than you are looking for, but I would say that our initial experience is that they are meeting their intended goals. I suspect that, after several more years of experience, we will be able to make the claim that they provided the safety net during the bad times and the savings during the good times. The Chairman: I should bring in Viscount Hanworth. The first part of your question has been dealt with, so perhaps you can ask the second. Q86 Viscount Hanworth: We have struggled to understand the provisions of the Agricultural Act 2014. You have enlightened us greatly. Perhaps our understanding would be enhanced if we learnt something more about the history of these farm support programmes, because they seem to have chopped and changed quite rapidly. I thought that we went from the 2000 Act to the 2014 Act, but we have just had the 2008 Act interpolated. Maybe you could give us some sense of what was lacking from previous Farm Bills.

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United States Department of Agriculture — Oral Evidence (QQ 84-87) Beyond that, we have a notion that the present Farm Bill is immensely favourable to insurance companies, which may have profited unduly. The question that arises in my mind is: would such circumstances threaten the survival of the provisions of the current Act? To go back to what I said previously, what overturned the provisions of the previous Acts? What went wrong? That is the question. Robert Johansson: I would not want to say that the 2008 Farm Bill was doomed by historic farm income. However, as policymakers were debating the Farm Bill at a time when they were interested in finding budget savings and when farm income in the United States was at record high levels, it was rather easy for them to say, “Should we be providing these direct payments at a time when producers do not particularly need them, because they are receiving record high prices for their crops?” At that point, moving towards more of a safety net/risk management approach was natural. We had some components of the ARC and PLC programmes built into the 2008 Farm Bill. I would not say that they were pilot programmes, but the ACRE programme laid the groundwork for the ARC programme and we had countercyclical payments, which laid the groundwork for PLC. As you are probably intimately aware, with most farm policy we have tried to make a better mousetrap over time, to see what works. Obviously that will change based on historical economic conditions and how the farm sector is doing. However, it is fair to say that US farm policy has moved over time, over a longer period, towards programmes that are more risk management based and more intended to support producers when something that you were not expecting happens. That is one of the reasons why we see more enrolment and strengthening of the crop insurance programme. It is certainly consistent with the movement towards an ARC or PLC type of programme for commodities. As one of your previous witnesses testified just prior to me, we want to make sure that producers are responding to market signals, not being shielded from them. We want producers to make efficient decisions and to improve productivity. As the market moves, we expect producers to adjust and to make their management decisions accordingly. Programmes that are based on base acres and are decoupled from current production systems are consistent with that approach. That is one part of your question. The other part of it concerns whether or not the crop insurance companies that are integral to the crop insurance programmes are making returns that are excessive. That is continually being debated here in the United States. The goal of having the private crop insurance providers be part of our crop insurance programme has

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United States Department of Agriculture — Oral Evidence (QQ 84-87) been around for a long time. We have crop insurance programmes that USDA administers solely, through USDA. For example, most of our disaster programmes for livestock producers are administered solely by USDA. However, the bulk of our expenditures on the crop insurance programme are through the Federal Crop Insurance Corporation. Private companies are part of that. They are the ones who go out and sell the policies to the producers and who pay the indemnities when there is a loss. The theory behind that is that those companies can do it more efficiently than the US Government, because there are so many producers out there and so many different types of products, and because producers want relief after a loss as quickly as possible, as opposed to waiting a number of months before it can wind its way through Washington and get back out to them. There are reasons why we have a public/private partnership in that sense. As you point out, there are continually debates occurring in the United States—in the private sector, the universities and in government—about the appropriate role of those companies and the appropriate rate of return that we should be looking to give them to provide that partnership with us. I do not know whether that answers your question. I am not here to say whether it is too high or too low. We have seen various legislation come about that has looked to limit it further. Most recently, in the President’s budget that was released yesterday, we have seen other ways to limit the scope of payments for crop insurance, whether it be by lowering the subsidies that are available to encourage producers to enrol in different products or by limiting directly the returns guaranteed to companies. Right now, I can talk about how the programme works for crop producers, if you want. Viscount Hanworth: No, that will be fine. I just observe that 62% of the premiums are paid by the federal Government. To summarise, I think that you are telling us that it is the countercyclical aspects of the 2014 Act that distinguish it from previous Acts. Would that be correct? Robert Johansson: Yes. We had countercyclical programmes earlier— Viscount Hanworth: But this one is advanced. Robert Johansson: I would certainly argue that the current programme is based much more on the countercyclical nature of returns. Viscount Hanworth: Thank you very much for that. I have been hugely enlightened. The Chairman: I move to the final set of questions. Lord Krebs?

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United States Department of Agriculture — Oral Evidence (QQ 84-87) Q87 Lord Krebs: Could you give us your views—if you are willing to—on how relevant the US model is to the European Union? Do you think that the different landscapes and institutional arrangements mean that there is no real read-across? Robert Johansson: It is hard for me to say what would work best for producers in Britain or in the EU. I know that our producers in the United States are very happy with the crop insurance programme. We have expanded it to include other producers who have not traditionally been covered by our crop insurance programme. I would imagine that producers in Europe or Britain would be keen to participate in a similar type of programme. It comes down to being able to have the historic data on yields and the price instruments available to be able to charge an actuarially fair premium for the product. That is a key component of our system. You are right—as was mentioned previously, the US Government pick up a good amount of the premium subsidy. Nevertheless, the premium that is determined is an actuarially fair premium, which means that, on average, the premium gathered covers the indemnities that are paid out. That is not an easy task to do when you look at the heterogeneity of US production, with different crops and different regions. It may be easier to do that for some producers in the EU or in Britain. There is a varied landscape. The more disaggregated you try to make crop insurance, the harder it becomes, because you need to have that data in order to get an actuarially fair premium. How do you then come up with the right subsidy? There are always debates about what the right subsidy amount is—whether it is too high or too low and whether or not the Government should back off on subsidies for certain types of products. Obviously producers would argue the opposite. A key component—some of your questions alluded to this; we have not had a chance to talk about all of it, but I know that you have already probed the issue with some of your other witnesses—is that with any farm programme policy you want to make sure that producers are responding to market signals and that there is the opportunity for improved productivity over time. Whichever programme you set up or find is attractive to producers, it needs to be one that does not necessarily shield them from a more efficient choice of production method, crop or livestock category. As prices go up for sorghum, we would expect to see producers in the United States plant more sorghum acres. This year, of course, that premium has disappeared and we are likely to see far fewer acres planted with sorghum. That is an example of how we would like our programmes to work. We would hope that there is a crop insurance product that producers who want to plant

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United States Department of Agriculture — Oral Evidence (QQ 84-87) sorghum can choose that is not overly generous with regard to subsidy but provides the right subsidy in order to correct for the economic fundamentals of any insurance programme—namely, that adverse selection occurs, so you need to provide some sort of subsidy in order to encourage larger participation by the producers who are growing the crop or buying the product. You certainly have the tools and data to do that in the EU and Britain. You have heard a lot of other suggestions and good ideas that are out there. What works for the United States, Canada or other countries may be something that would work on a larger scale in Europe. I know that some crop insurance programmes are available to some producers in some EU countries. Hopefully I have managed to answer a good number of your questions. I would be more than happy to follow up with written responses to some of the questions that we did not have a chance to cover today, if you would like. If so, please reach out. I am more than happy to take more questions, but I understand that we have a limited amount of time today. The Chairman: We do. Both the offer that you have just made and the clear interest that you have taken in the work that we have done up to now—as well as your evidence-giving today, which has been really helpful to us—are much appreciated by the Committee. On behalf of my colleagues on the Committee, I thank you very much for getting up so early and coming to give evidence to us. I am sure that we will be in touch. Robert Johansson: It is my pleasure. Thank you.

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Welsh Government — Written Evidence

Welsh Government — Written Evidence Welsh agriculture is important for Wales and we want it to thrive. Agriculture in Wales has strengths but there is more to do to help the industry release the potential and deal with the challenges and threats. Our strategic framework for Welsh Agriculture was consulted on during the summer of 2015 and attracted considerable support from the industry. The resulting Partnership Group, comprising leading industry stakeholders and the Welsh Government will aim to address these issues. Our vision for agriculture is: A prosperous, resilient agriculture industry promoting Wales’ present and future well-being. We would consider the industry to be prosperous if we have farm and related businesses which are profitable, creating skilled employment and bringing widespread economic benefit. Resilient businesses are robust and able to withstand setbacks whether economic or from natural causes. Consequently, they are also better able to manage the expected decline in direct support from the Common Agricultural Policy. Welsh agriculture needs to be more market focussed, aware of current demands and future opportunities. Production must be sustainable in the widest sense both economically and environmentally with these outcomes being mutually compatible. While some farm businesses focus on one product, others may be well placed to produce several products, or to develop a wider range of products such as renewable energy or managing the natural environment and water. Businesses which do these things well should thrive and, importantly, will contribute to Wales’ present and future well-being. Challenges to Welsh agriculture There are many challenges (and opportunities) facing Welsh agriculture which will need to be addressed if we are to achieve the vision and desired outcomes. The Partnership Group we are establishing alongside key stakeholders will consider the challenges when developing and implementing action plans linked to our key policies. The challenges are: 

Drive improvements in the industry to raise efficiency, profitability and productivity.

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Create thorough understanding that production, good farming practice and care of the environment go hand in hand.

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Prepare for the opportunities and threats that climate change brings.

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Welsh Government — Written Evidence 

Grow and develop markets, raise awareness of forecast market trends, promote innovation and readiness to diversify and to view ‘farm products’ in the widest possible sense.

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Strengthen capacity to withstand setbacks whatever the cause (e.g. market conditions, changes in levels of public support, weather and natural events, or animal and plant diseases).

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Embed Welsh Government policies to ensure implementation and interpretation of Regulations is effective and appropriate.

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Adapt to the change in financial support caused by CAP Reform, both direct income support payment and the new Rural Development Programme which must be viewed as two sides of the same coin.

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Work together to promote better public understanding of the industry’s considerable contribution to Wales’ well-being.

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Make significant reductions in Carbon emissions in line with national targets

EU, CAP and Market Impact Some important factors are beyond our control but can have a big impact on the industry. The income support payments provided by the CAP are likely to fall further after 2020. Pillar 1 payments can provide useful financial support and be used as a safety net for farm businesses but they can also be reasons why farm businesses innovate and embrace change more slowly than they might otherwise do. In other words direct subsidy of the type provided via Pillar 1, is potentially a barrier to individual businesses and the wider industry addressing the challenges we have identified and realising the long term vision. The Welsh Government’s preference has been and continues to be for more targeted intervention through Pillar 2. Commodity prices, currency exchange rates (euro versus sterling), supply/demand imbalances can all weigh positively and negatively upon exports and input costs. These impacts can present challenges for the industry. The Welsh Government is not able to fully manage these impacts alone although if the industry addresses the points listed under the challenges paragraph (above) this will put farming businesses and the industry as a whole in a stronger, long term position.

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Welsh Government — Written Evidence CAP Simplification In the long term the Welsh Government would like to see CAP simplified; the recent CAP Reform has not met the objectives of creating a simpler system or a fairer one. The Welsh Government would like to see the following: 

a more proportionate approach to implementation and control, reducing the burden on claimants and administration.

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flexibility on some mandatory provisions such as Welsh Government being able to change minimum payment levels, capping levels, apply a maximum euro limit on an entitlement value and the ability to amend greening to encourage more arable farming practices in Wales.

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For greater clarity in the Regulations many aspects of which can be open to interpretation.

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To have freedom for Paying Agencies to detect a genuine administrative error and work with the claimant to correct the error as part of the application error rather than be required to action more serious sanctions.

Attitudes and Interventions Farming attitudes can vary greatly within Wales regardless of age and sector and this makes it difficult to promote a strategy that meets the needs of everyone. However, there is a willingness within industry bodies to want to work alongside the Welsh Government to develop a long term vision for the industry. Wales is small enough to do this effectively. Wales’ approach is to encourage the industry to establish a Partnership Group, The Group will select a chair from within the agriculture industry and the Welsh Government would be a member of the Group. The functions of the Group will be: 

To own the vision and lead action to realise it for the industry’s and Wales’ wellbeing.

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Act as an umbrella, over time integrating and streamlining various industry/Welsh Government groups working in this area.

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To establish and manage action groups to develop and execute action plans necessary to achieve the vision, taking full account of existing industry reviews and recommendations.

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Focus on actions that can deliver significant impact and progress. 366 of 373

Welsh Government — Written Evidence 

To strengthen communication, co-operation and co-ordination within the industry and to raise its profile in Wales.

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To champion a forward looking, innovative entrepreneurial spirit in the industry

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To consider and react to new issues that could impact on the agriculture industry, ensuring the industry responds well to both opportunities and challenges

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To advise the Welsh Government about progress made towards the realisation of the vision.

EU Aid Allocation The Welsh Government has utilised emergency aid from the European Commission. Recently the European Commission tabled a package of measures 'worth €500 million’ at the extraordinary Agriculture Council meeting on 7 September. Similar to other UK countries, the Welsh Government used the available funding to support the dairy industry. The dairy sector has been hardest hit and for the longest period of time. There is no obvious end in sight to the global factors creating the current market conditions. The lamb sector too has had a difficult year and may have expected support but Hybu Cig Cymru is providing support through an earlier and bigger marketing campaign. There are also some signs of improvement in market conditions. The average payment per farm in Wales was €1800. By the first week of December, 1,392 Welsh dairy farmers had received their payment, a further 270 should receive payment before the end of December EU Aid packages of this type do help but they are by no means the panacea. The dairy sector faces many challenges and a one-off relatively modest payment will only have a limited impact and could well entrench further attitudes within the industry that the Government will ‘bail us out’. A more effective solution would be to focus on the fundamentals of what makes farm businesses and the industry in Wales stronger so they can cope with these challenges without the need for government interventions of this kind. Insurance In line with the recommendations of the 2014 Kevin Roberts ‘Independent Review into the Resilience of Farming in Wales27’, it is the intention of the Welsh Government to commission

27

http://gov.wales/docs/drah/publications/140128reviewresiliencewelshfarmingen.pdf

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Welsh Government — Written Evidence a feasibility study (by August 2016) to investigate the commercial viability of insurance options to redeem and/or restore agricultural production following an extreme weather and/or catastrophic event.

It is planned that the resulting evidence will inform policy

development for a decision on whether Measures relevant to agri-insurance options should, or should not, be pursued as part of the 2014-2020 Welsh Government Rural Communities – Rural Development Programme. The Welsh Government recognises that the industry needs to work together and look to itself to solve these problems and not always look to the Government to provide the answer. The Forage Aid is a good example of this. It is common practice for farmers to insure prize breeding animals and manage risk for some products such as arable and milk by using future priced contracts. Yet many choose not to insure, either running with the risk or in some instances, animal disease being a good example, because the risk for some diseases is currently carried by government rather than individual farm businesses 21 December 2015

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Martin Wilkinson — Written Evidence

Martin Wilkinson — Written Evidence This written response to the call for evidence is a personal submission not a response on behalf of either Harper Adams University or the Institute of Agricultural Management. I am a senior lecturer in farm business management and agricultural policy at Harper Adams University and have 21 years’ experience in farm management consultancy with ADAS. This response is based on the combination of first-hand experience working with farm businesses across England and Wales, and the research activities of my students, in particular post-graduate research over the last 7 years. This contribution focusses on the interface between individual farmers and the wider business environment occupied by policy and market drivers. In recent years there has not been a shortage of advice schemes funded via mechanisms such as the rural development programme and demonstration projects. Despite this available to farming businesses of advice, the evidence of UK total factor productivity (TFP) suggests that UK farming TFP falls behind that of competing developed country agriculture, including other members of the European Union (EU) operating under the same Common Agricultural Policy (CAP). For much of my career in the Agricultural Industry, the Great and the Good have circled the industry knowing what would be good for the industry and providing it. At the same time many farmers appear, to varying extents, not necessarily to recognise what the Great and Good say would be good for them and proceed to operate their farm businesses as they wish. While I accept this as an anecdotal statement it is heartfelt and I feel does stand up to further scrutiny. If entrepreneurship encompasses elements of innovation; breaking the model; doing it differently; adoption of technology and so on, perhaps a question should be what have been and continue to be the barriers to entrepreneurship in UK agriculture? One of my postgraduate research students explored the barriers to adoption of business advice. The findings fundamentally were that there was not a great appreciation of the need to adopt business advice. This aligns with a response to my question on entrepreneurship (para 6) at the Institute of Agricultural Management 2015 Farm Management Conference at The Royal Society. Graham Redman from the Andersons Centre was the only panel member to offer a response, saying that under the current CAP regime farmers do not see the need to change. The Farm Practice Survey Autumn 2012 – England conducted by Defra (2013b) found that 60% of the farms questioned would be unwilling to pay for advice. I suggest that this relates not to the cost, but a failure to recognise value of benefit from advice. The issue of subjective norm (SN) in terms of taking and adopting business advice needs consideration. My student’s research finds suggest that there is perceived pressure from the social group (other farmers) upon the individual to carry out the behaviour of using business management advice (BMA) compared to other advice. In this context BMA relates to specific advice at a whole business level as opposed to other advice at enterprise level, such as agronomy or nutritional advice from respective advisors or providers of information (farming press; social media; internet; other farmers). The expectation is that it is their

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Martin Wilkinson — Written Evidence business and they should be able to manage it. A “locus of control” challenge for both policy makers and market drivers. Aligned to the observation on SN, the body of work on farmer typology originating from the work of Gasson, and more latterly from the research findings of Rehman and Garforth (University of Reading) and Wilson (University of Nottingham) merit mention. Not all farmers are totally profit orientated business managers. There is a clear need for sufficient profit, but beyond that a whole range of other emotions and goals intervene. A critique of the MINDSPACE framework used by Defra for the development and delivery of policy indicates that the Messenger needs to recognise the goals of the farmer just as much as the goals of the policy maker. (Pannell et al., 201128; Vanclay, 201129; Llewellyn, 201130; Curtis and Mendham, 201131). From personal experience of bidding for and delivery of funded advice programmes I would urge caution in relation to the question “How can farmers be encouraged to acquire the skills needed to operate a modern business-like operation?” Advice programmes can result in a feeding frenzy of competing advice providers seeking to secure as many farmers as possible to target and advise. The lack of skills and time needed to appreciate the underlying goals of farmers were a problem, as were the skills needed within the farm business to convert the advice given in to an action plan that they actually wanted to adopt. The core drivers to answering the questions posed by the committee are those of recognition of the value of strategic and business management and its alignment with achievement of the goals that UK farming family businesses have. I differentiate strategic and business management simply to differentiate size of decision making and associated timescale. Using strategic as an indicator of larger scale decision making with a longer time scale, and business management as an indicator of operational management , accepting that all are encompassed within strategic management process as described in the literature. Development of the business skills in the farming business will I believe lead to increased application of strategic and operational management of business, incorporating greater resilience in to the management practice. A question not posed by the committee, but one worthy of consideration is the extent to which individual farm businesses are aware of the need both now and in particular in the future to develop farming systems that incorporate greater resilience? Ideally this question would have been addressed by the industry before now. There has been plenty of evidence of potential volatility associated with the global commodity trading patterns for over two decades. Structurally the global supply:demand is broadly in balance but it is the combination of one or more “events” causing imbalance. The findings of the Foresight report should be incorporated in the planning and management behaviour of individual farming businesses. Was it made available in a digestible format? Is this an example of policy / industry failure? 28

Pannell, D., Marshall, G., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. 2011. Understanding and promoting adoption of conservation practices by rural landholders. In: Pannell, D. and Vanclay, F. Changing Land Management Adoption of New Practices by Rural Landholders. Australia: CSIRO Publishing. pp.11-38 29 Vanclay, F. 2011. Social principles for agricultural extension in facilitating the adoption of new practices. In: Pannell, D. and Vanclay, F. Changing Land Management Adoption of New Practices by Rural Landholders. Australia: CSIRO Publishing. pp.51-67 30 Llewellyn, R. 2011. Identifying and targeting adoption drivers. In: Pannell, D. and Vanclay, F. Changing Land Management Adoption of New Practices by Rural Landholders. Australia: CSIRO Publishing. pp.87-94 31 Curtis, A. and Mendham, E. 2011. Bridging the gap between policy and management of natural resources. In: Pannell, D. and Vanclay, F. Changing Land Management Adoption of New Practices by Rural Landholders. Australia: CSIRO Publishing. pp.153-176

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Martin Wilkinson — Written Evidence (failing to communicate in a way that a core stakeholder group could follow and understand the messages contained within) The committee will be familiar with figure 1, the UK Defra TFP graph sourced from Eldon Ball et al (2006) Productivity and International Competitiveness in European Union and United States Agriculture, with added data from USDA and Defra. Commentators indicate that it is the existence of the CAP and the pillar one payments that mean farmers are protected from the market place and as such do not need to focus on efficiency. This is a sentiment that I have sympathy with. However other member states, in which farmers benefit from pillar one payments demonstrate greater rates of TFP gain than the UK.

In the pre-2014 CAP consultation meetings run by Defra on the issue of modulation (9% or 15%) the farming lobby came out firmly in favour of 9% modulation. Having listened to the argument about different modulation rates and the impact on farm profitability at the consultation meeting, it became clear to me that farmers were arguing about £20-£30 per hectare impact on support income and thus profit. At the same time the Farm Business Survey (FBS) typically shows a differential across all farm types of £300 to £350 per hectare. My suggestion was that higher rate modulation would be more appropriate but for skills development axis as opposed to agri-environmental scheme payment. I did make this point in my response to that consultation and would gain urge the point be considered in the current consultation. While many of the questions posed in the consultation call for evidence are perfectly understandable, I urge thought be put to the challenge of farmers goals, what they may value in terms of achievement of their goals. By addressing this communication issue, it should contribute towards addressing the barrier to adoption of better practice to address the challenges of resilience in volatile times. 371 of 373

Martin Wilkinson — Written Evidence 31 December 2015

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Professor Paul Wilson, Country Land and Business Association, and National Farmers Union — Oral Evidence (QQ 12–23)

Professor Paul Wilson, Country Land and Business Association, and National Farmers Union — Oral Evidence (QQ 12–23) Transcript can be found under Country Land and Business Association, National Farmers Union, and Professor Paul Wilson — Oral Evidence (QQ 12–23)

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