Denis Naughten (Longford-Roscommon, Fine Gael)
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I wish to share time with Deputy Wall.

I thank the Ceann Comhairle for the opportunity to raise this important issue. Dairy farmers' incomes are declining rapidly as a result of falling milk prices and escalating farm costs. In 2005, dairy farmers are less well off compared with 2000 by €10,000. In 2000, the standard size dairy farmer generated the average industrial wage. However in 2005, the standard size dairy farmer generates half the industrial wage, that is, €15,000 compared with €30,000. In that period, the burden of input costs has gone up dramatically. The cost of feedstuffs has gone up by 7%, fertiliser by 9%, fuel and electricity by a massive 35%, much of which is due to a lack of Government intervention and a lack of competition in the electricity market, and veterinary expenses by a whopping 44%. If the Minister gets her way later this year in regard to prescription only medicine, they will increase significantly again.

The falling milk price is due to a combination of the Common Agriculture Policy reforms and lower market returns from cuts in the EU dairy market supports. Unless definitive action is taken at EU level, profitability of the Irish dairy farming sector could be heading to zero, or non-profit, by 2008 when the single farm payment is taken out of the calculation. It must be recognised that the dairy sector is a hugely important element of our economy. In 2003, the dairy sector accounted for the largest share of gross agricultural output at 30.5%. In monetary terms, this gross output at producer prices came to €1.4 billion. However, the future is bleak.

Existing dairy farmers face a situation where non-active dairy farmers, merely by taking their single farm payment, could end up better off than those actively farming. New entrants without a decoupled payment will find themselves in a situation where it will not be viable for them to enter the dairy sector. When the current differential between those leaving the dairy sector and those new entrants coming in is taken into consideration, there is a massive fall off in the number of active dairy farmers and it could lead in future to regional quotas not being filled.

It is imperative action is taken at European level to ensure there is an adequate EU budget for the dairy sector and that it is maintained at market levels which will sustain dairy farming into the future. Dairy product prices cannot be allowed to fall to intervention prices as set out by the mid-term review. We need urgent sustainable market prices to be put in place for dairy products to ensure there is an adequate return on the huge investment which many dairy farmers have put into dairy production.

Since January of last year, there has been an 88% cut in supports for casein and a 77% cut in supports for skimmed milk powder. Unless immediate action is taken at European level, the Commission will keep the budgets at this level and will not support these products going forward. It is important we have a price equivalent to the Irish Dairy Board of 31 cent. That is set as the baseline going forward in regard to supports for the dairy sector. The debate between the UK and the EU in regard to budget rebates should not be used to fudge this issue and reopen the negotiations on CAP. Agreement has been reached and it must be maintained and the 31 cent level must be our target going forward.

Jack Wall (Kildare South, Labour)
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I thank Deputy Naughten for giving me the chance to contribute. Dairy farmers' incomes are under severe threat due to a combination of a fall in milk prices and increased costs. The fall in milk prices is due to a number of factors. The principal factor in recent times has been the massive cuts in market supports. Since January of last year, the EU Commission has used every opportunity to cut dairy market supports. Casein production has been cut by 88% and SMP export refunds have been reduced by 77%.

Unless there is definite political direction by the EU farm Council, the EU Commission will bring about a collapse in EU dairy product prices down to the so-called intervention prices set by the mid-term review agreement. These prices were never intended as normal market prices but were set as doomsday prices when the Commission would be forced to act. If these prices were to come about, profitability in dairying by 2007 would be virtually non-existent. The Minister, who has already raised this issue at the farm Council, must make this a priority for Ireland at EU farm Council meetings.

Brendan Smith (Cavan-Monaghan, Fianna Fail)
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I am glad to have the opportunity to debate the current situation in the dairy sector and to inform the House about the comprehensive set of initiatives taken in recent weeks to emphasise Ireland's strong opposition to the European Commission's management of the EU dairy market.

Both at Council of Ministers and at bilateral meetings with the EU Commissioner for Agriculture and Rural Development and other Ministers, the Minister, Deputy Coughlan, has consistently challenged the progressive reductions that have been proposed by the Commission and the negative effect these proposals are having on the competitiveness of the EU dairy sector. In particular, I am concerned about the impact these reductions in aids and subsidies are having on the ability of the Irish dairy industry to export dairy products to third countries.

At the Council of Ministers meeting of 30 May, the Minister specifically raised this matter and secured the support of a number of other member states with which we had bilaterally raised our concerns and which shared our point of view. During the discussions, the Minister very resolutely argued that decisions at the milk management committee were causing severe pressure on the ability of the sector to compete in international markets, which had been carefully built up over decades and with which the EU dairy industry and Ireland in particular had established a very successful trading partnership.

The Commissioner was told that the reductions in aids and subsidies represented a far too aggressive market management approach by the Commission. The Minister particularly emphasised the recent reductions in casein aid and export refunds for butter and skimmed milk powder. The Minister urged the Commissioner to ensure the delivery of greater market stability in the period ahead when the further institutional price reductions of the 2003 Luxembourg Agreement are due to be implemented. Stability in this period is absolutely essential so that the industry is capable of concluding sales contracts and setting raw material prices in a stable commercial environment as we move into the third quarter of the year.

While the Commission management of the market for dairy products is a factor in determining price signals for raw material producers, it is nonetheless important not to lose sight of the fact that milk price is determined by a number of other factors, including the international market for dairy products, the type of products being produced, their market destinations and the efficiency of production and processing. Producer prices for milk in Ireland have remained stable in recent years despite reductions in intervention prices for butter and skimmed milk powder. These reductions in institutional support prices have resulted in farmers being compensated in 2004 to an amount of €60 million or 1.2 cent per litre. Further compensation of 2.4 cent per litre, amounting to €120 million will be paid this year as part of the single farm payment introduced as a result of the Luxembourg Agreement on the reform of the CAP.

The key for Ireland, and the area we directly influence, is internal competitiveness. Clearly aids and subsidies at EU level are essential ingredients in our relative competitiveness on world markets and we will continue to remind the Commission of this key fact in its market management decisions. We cannot escape the fact that there are internal structural impediments in our domestic dairy sector that need to be addressed so that we remove the factors that inhibit growth and development. These matters need to be addressed in a more purposeful manner at primary and secondary level and in terms of matching product mix with emerging market and consumer demands.

Denis Naughten (Longford-Roscommon, Fine Gael)
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And roll-over relief.

Ivor Callely (Dublin North Central, Fianna Fail)
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This is good stuff.

Brendan Smith (Cavan-Monaghan, Fianna Fail)
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At farm level we must look at increasing the scale of operations, reducing costs where possible, and encouraging a profitable future in the sector for the next generation of dairy farmers. While the mid-term reform of the CAP has ensured the extension of the quota regime until 2014-15, it is imperative now, more than ever, to assist those who wish to expand their operations within this new environment. The 2005 milk quota restructuring scheme as well as other changes to the milk quota regulations introduced are part of a two-year restructuring programme for the purchase and sale of quota. The purpose of the programme is to allow dairy farmers to plan ahead with greater certainty, thereby enabling the restructuring programme to operate more effectively having regard to the need for more competitive milk production.

At processor level too there is a need for greater rationalisation. The industry here is competing against much larger enterprises that are increasing their scale at a faster rate than we are. Dominant players have emerged in countries such as Denmark, the Netherlands and New Zealand and these are models of scale and operation that will challenge our industry as world trade liberalises even more in the next WTO agreement.

While we move forward in our internal structural reconfiguration I remain convinced that a combination of internal supports and competitive levels of export refunds are vital components of a balanced set of aids and subsidies that will maintain market share and provide the vital competitive edge to ensure that the EU can utilise its internal milk surplus. I have impressed upon the Commission, as has the Minister, Deputy Coughlan, that unless these supports are viewed in a market context rather than a budgetary one, they will be less effective in meeting their commercial objectives and will miss the current opportunities to expand EU markets.

The Minister, Deputy Coughlan, has taken a leading role in bringing other member states who share our view on the Commission market management policies together to make a collective stance on these issues. We will continue to exert every possible pressure on the Commission to achieve a satisfactory outcome for the Irish dairy industry in terms of enhanced industry competitiveness and stable farm incomes.