Brendan Smith (Cavan-Monaghan, Fianna Fail)

I wish to deal with a few important points made by earlier speakers. Senator Bradford referred to the possible need to restructure the industry. In recent years the Department had the dairy investment fund, which allowed us to provide new facilities and to upgrade existing facilities and there was better cohesion and synergy. Senator Bradford rightly spoke about the need for rationalisation and that it is not always easy to achieve rationalisation and reorganisation. I agree with him in that regard. There is a need for further restructuring of the industry. However, that needs to come about through partnership and must be led by the industry. One of the major players in the industry recently spoke about the need for further rationalisation and sharing of facilities, and better synergy.

Senators Carty and Coffey also mentioned the difficulty of farmers getting adequate credit supply. I have raised this issue with all the senior agricultural advisers in each of the banks recently. I asked the banking and financial institutions to deal sympathetically and in an understanding manner particularly with dairy farmers. Senators Quinn and Norris spoke about the need for sustainability in the industry. There will be sustainability because we have got an increase in quota. We have the capacity to produce additional milk and dairy products. We are going through very difficult times at present, but the medium to long-term outlook is much more positive.

Senator Quinn mentioned that the world's population will grow considerably. It is estimated by the Food and Agriculture Organization of the United Nations that we will need to double food production by 2050, which will provide Ireland with great opportunities to export more product. Currently we are 900% self-sufficient in beef and we export in excess of 80% of the dairy products we produce. I take the point made by Senators Quinn and Norris about the need to protect the food production base in Europe. We need to deal with our environment and climate change. We cannot allow food production to be restricted in a country where we have a very efficient system. New Zealand and Ireland have the two most efficient food production systems in the world. By definition that means we have fewer greenhouse gas emissions in the production of food than do other countries. At the Council of Ministers I have clearly and consistently stated that under no circumstances should the food production base in Europe be eroded, restricted or reduced. If that were to happen we would end up as a big importer of food into the European Union. We would be taking that food from other continents that are far away where the production systems are considerably less efficient and there would be deforestation to produce more grassland that would do further damage to the environment. We would then be hawking food around the world, which would not be in the best interests of consumers or in the interest of our desire to protect and enhance the environment.

Senator Quinn spoke about the progressive nature of the dairy industry. We have a very progressive dairy sector. We are very fortunate to have a world-renowned research centre at Moorepark in north County Cork. It is regarded throughout the world as the leading research centre in dairy science and at the cutting edge of technology. It is important to have those resources to assist and work with our industry. Thankfully the industry is working together with our universities and research institutions on a partnership basis. We all know it is no good doing research if it does not translate into jobs and wealth creation for the benefit of our country and the industry.

I welcome this opportunity to debate the current state of the dairy sector and each of the contributions made in the debate have addressed the serious issues facing dairy farmers at present. Last November when it became apparent that dairy commodity prices internationally were in decline I contacted the EU Commissioner for Agriculture and Rural Development, Mariann Fischer Boel, to press for the reactivation of dairy market supports. These had been suspended since 2006 because of the historically high milk prices that had prevailed in the intervening period.

The first step taken by the Commission following my intervention was to introduce an aid scheme for the private storage of butter a full two months ahead of the normal date. This meant that butter market support was available in January instead of March and this scheme remains in place. It has already supported the storage of 96,000 tonnes of butter at EU level. Also in January export refunds were re-introduced for butter, cheese, skimmed milk powder and whole milk powder. In March public intervention for butter and skimmed milk powder was opened. When the mandatory limits of 30,000 tonnes and 109,000 tonnes respectively were purchased at the intervention price, I arranged a bilateral meeting in Brussels with the Commissioner. At that meeting I secured agreement for the continuation of these schemes under tendering arrangements at close to intervention prices.

To date 81,000 tonnes of butter have been bought into intervention, equal to 8% of the butter production in January to June. In addition 96,500 tonnes of butter have been stored under the private storage aid scheme. Some 203,000 tonnes of skimmed milk powder have been purchased into stock, equal to more than 38% of the skimmed milk powder production in January to June this year. Some 20,000 tonnes of butter from Ireland and 27,000 tonnes of skimmed milk powder have been funded under these schemes at an approximate value of €60 million to Irish dairy processors. So far this year licenses to export 96,000 tonnes of butter and butter oil, and 123,000 tonnes of skimmed milk powder have been issued which will enable these quantities to avail of export refunds for export outside the Community. Similarly, licences were issued in respect of cheese exports for 129,000 tonnes. The support value of this trade amounts to a further €113 million when these products are exported. Taken together there has been a considerable commitment of EU funds to support the dairy sector.

The purpose of activating these measures is to get product off the market to give a necessary stimulus to the product that is on the open market. However, with the market continuing to show resistance, price returns to dairy farmers in Ireland are now at levels that threaten the very viability of many farm enterprises. While this would be unwelcome at any time, in this recession there is the risk of long-term damage to the food supply chain. I have explained in detail to the Commission why it is difficult for many to understand that in this current severe market downturn we have a self-imposed technical impediment preventing the use of export refunds in support of cheese exports outside of the Community in the quantities demanded by the market. This does not make sense in the current environment and I have once again urged the Commissioner to remove the free at frontier price for cheeses at the earliest opportunity. If we were to succeed in getting this measure changed, it would be particularly important in the export of cheddar cheeses, of which Ireland produces a considerable amount.

I have also stressed the need to examine other steps that may assist in reversing the downturn and stimulating the market further. For example, intervention purchases of butter and skimmed milk powder will close at the end of August and the private storage scheme for butter shortly beforehand. The role of private storage in particular and also intervention is such that their continuation after the normal end dates will be crucial in preventing further market turbulence at a time when supplies would otherwise hit commercial markets. While I understand legal impediments remain to be overcome, the view I have articulated at meetings of the Council of Ministers is that the market situation warrants an exceptional response on this occasion. As recently as Monday night in Luxembourg I again spoke to the Commissioner about the need to implement this measure.

The dairy sector downturn has its roots in the supply response that resulted from high prices in 2007 and in the early part of 2008. That situation was then exacerbated by the international financial crisis. This has had a major effect on the demand side. Difficulties with access to credit have exacerbated what was a cyclical downturn into a major reduction in international demand for dairy products. The market is carrying surplus stocks as a result. Farmers across the European Community and farmers in Ireland in particular are facing very severe difficulties in making ends meet as has been articulated by the previous speakers. Prices are historically low and while the Commission has made every effort to stabilise the situation, there is no real sign that a recovery is in sight.

Over the past year or so we have witnessed extremes of volatility in dairy product prices on an unprecedented scale. This volatility is a symptom of the changed EU policy framework under which we are operating, where world market forces have a major influence on the price paid for milk. The mid-term review of the Common Agricultural Policy in 2003 implemented a series of reforms that resulted in a shift from market support to direct income support. Though these changes were expected to lead to a reduction in the prevailing milk price the opposite occurred and by 2007 we had the international commodities boom that saw prices reach as high as 40 cent per litre and average at 34 cent per litre for the year.

For a dairy producing country like Ireland, where we export the vast majority of our product, this new framework is particularly relevant. Ultimately the market is the source of income and to maximise income the focus needs to be on competitiveness, efficiency and innovation. One of the major challenges in the medium term will be to ensure Irish farming and the agrifood sector are at the heart of an evolving high-value food market, which is focussed on quality and innovation. This is at the core of Government strategy, as is evident from the National Development Plan 2007-13, AgriVision 2015 and the partnership agreement Towards 2016.

The AgriVision 2015 plan in particular sets out a series of actions, many of which have been implemented, to develop a competitive, innovative and consumer focussed agrifood sector. As part of this overall strategy, the Department provided funding of €115 million towards investment in dairy processing. A total of 19 capital investment projects were approved and awarded Government grant assistance under the fund, which will generate an estimated capital spend of €286 million at full production. Senator Paul Bradford referred to this issue earlier.

The fund's purpose is to increase the efficiency of main dairy outputs by supporting the upgrading of plant and buildings. This will assist operators in capturing new business in global markets and in developing new value-added products. By stimulating necessary investment in the sector, the fund will help to ensure the long-term competitiveness of the dairy industry in Ireland.

Many of these projects have already been completed, while others are close to commissioning stage and the remainder will be progressed over the next year or so. Together, these investments will add to the value of dairy sector output and in turn stimulate new trade opportunities and increase overall output in line with increased farm level output resulting from the easing of supply controls agreed as part of last year's health check.

From a dairy sector perspective, the health check of the CAP agreement last November had two key elements, namely supply control and market support. The agreement essentially provided the framework for the EU milk quota regime leading up to its abolition in 2015. As Senators may be aware, there was a wide divergence of views among member states in the months leading up the final negotiations as to the best course of action on milk quotas. Commissioner Fischer Boel made it clear that she would not be proposing the continuation of the quota regime beyond 2015. The question was whether, and to what extent, milk quotas should be increased in order to provide a so-called soft landing ahead of abolition.

Many of our colleagues argued in favour of annual quota increases up to 5%, while others were opposed to any increase. I adopted an ambitious approach that would facilitate the maximum possible fulfilment of the production potential in the Irish dairy herd. In that context, the decision to increase quotas by 1% each year from 2009 to 2014 was a good outcome. So also was the downward adjustment in the butterfat co-efficient that equates to a further 2% rise in quotas this year.

When the 2% quota increase in 2008 is taken into account, the result is a cumulative increase of 9.3% in Ireland's milk quota by 2014 compared with 2007. This will help our dairy farmers to maximise their production potential and to maximise the natural advantage they possess in the form of a grass-based production system. This in turn will lead to efficiency gains and help to achieve a competitive edge in an increasingly volatile world market. If on the other hand EU production is constrained by quotas, it will prevent Ireland from benefiting from future upturns in dairy markets. In that scenario the only winners would be our global competitors. I referred earlier to the UN Food and Agriculture Organisation's projections in regard to the demand for food up to 2015 when the world will need to double its food production.

I recently announced the allocation key for the first of the five annual 1% milk quota increases agreed under the health check. Three quarters of the increase will be allocated to all active milk producers on a permanent, saleable basis. The remaining one quarter will be allocated to new entrants to dairying on a scale designed to achieve viability from the outset. That has been warmly welcomed by young farmers and their representative organisation.

It has been suggested that the EU quota increases to all member states are the cause of current low prices for milk, but this is a flawed argument. In its report to the Council last Monday, the European Commission said that milk production in the quota year 2008-09 has fallen by 0.6% compared with the previous year and that overall production was 4.2% below quota by 31 March 2009. To attempt to attribute the current market weakness to the additional quota allocated as part of the health check is patently wrong - it is a demand-led problem. The serious problems facing the dairying industry today are linked to the lack of disposable income for consumers worldwide.

At national level the focus in the milk quota area is on ensuring the maximum possible volumes of quota are made available to active and committed dairy farmers. This will facilitate the efficiency gains that are necessary in an increasingly competitive market. Domestically, work continues on making the quota regime as simple, flexible and responsive as possible for Irish milk producers. The main vehicle for this is the milk quota trading scheme, but there have also been other significant steps in the form of an overhaul of the milk quota regulations.

The milk quota trading scheme has just completed its third year of operation and continues to be implemented successfully. The trading scheme replaced the old milk quota restructuring scheme and brings a more open-market approach to the transfer of milk quotas. It gives buyers and sellers freedom to dictate the price at which quota is traded within each co-op collection area. A total of 375 million litres of quota has been transferred to active producers since the scheme's inception and it has continued to contribute to the process of consolidation at producer level.

The other key dairy element in the health check was market support. In the negotiations we strongly defended the view that quota increases must be matched with effective dairy market management measures. The transition to a post-quota EU dairy market, along with current market fluctuations, makes this particularly important. We therefore called for the continuation of such measures and, above all, those schemes which are especially important for Ireland. In the early part of those negotiations we were on our own in defending the necessity to retain those market management measures, namely, intervention, aids to private storage and export refunds. I shudder to think what situation we would be in today if those market management measures were not now available to the European Commission to trigger and activate. During those negotiations last year, however, we fought a lone battle practically right to the end and then we got some support from other member states.

Allied with the liberalisation of quotas, we insisted in the negotiations that critical market supports for the type of dairy products manufactured here in Ireland would remain in place. They must continue to function in support of the market to sooth volatility and assist the industry in meeting its competitive challenges. In the event we managed to maintain the butter and skimmed milk powder intervention schemes intact despite powerful forces opposing the retention of these schemes. A determined effort was made to introduce tendering for every tonne of butter and SMP intervened. This would have been particularly difficult for Ireland. The importance of these measures cannot be overstated as they play a crucial role in levelling the market supply and demand dynamics. They have a vital role in Ireland given our seasonal pattern of production. This is also true for private storage aid for butter where existing arrangements were maintained, although once again there was strong opposition intent on introducing tendering arrangements.

Our foresight in fighting to maintain these market supports has been vindicated and they are now being used to deal with the current situation, as I outlined. I would like to see those measures used more effectively, which is what we have been urging the Commission to do. It is important to utilise the available supports to manage the transition period until we emerge from the current period of turbulence. We can expect to see some supply side adjustments as producers respond to market signals. Realignment of consumption and production across international markets will help restore equilibrium to the markets once more.

It is important to emphasise that medium-term prospects for global dairy markets are good. Despite the current economic turbulence, growth in wealth and population is forecast to stimulate strong levels of demand for dairy products and returns will improve commensurately. The Government is committed to ensuring the Irish dairy sector reaches its full potential. We will continue to maintain close contact with the EU Commission to ensure support measures are activated at levels that will make a real impact in the market. This will enable us to manage the transition period until demand recovers and good prospects forecast for dairy markets can be fully realised. That support is needed by our dairy industry, from farmers, who are the primary producers, to processors.

In Ireland and other member states the issue of retail margins on food products has become a point of heated debate in recent times. I raised this issue on a number of occasions at the Council of Ministers, most recently last Monday. Last January, there was a discussion on a road map to improve the functioning of the food supply chain. I said then that competition alone cannot act as a sole mechanism to maintain efficient markets. The careful and sensitive use of market management measures can help to maintain balance on the market when appropriate and the use of such mechanisms can assist in the provision of fair returns to producers.

Underlying the debate is the increasing concentration of retail power in the hands of a few large supermarket chains. This is an international phenomenon, which has fundamentally changed the balance of market negotiating power in the food chain. This is one factor, although not the only one, behind the declining share of retail prices which is passed back to producers. While there is always potential for some conflict in any market relationship, there has been a noticeable trend recently towards greater conflict and even allegations of sharp practice. We cannot and should not ignore this. Many of my colleagues on the Council of Ministers also expressed strong views on this matter, and we will keep it on the Council's agenda.

Consolidation at processor level is also necessary to ensure maximum efficiency and to balance the market power of the large retail multiples. Competition policy must be sensitive to this. These difficulties are heightened by the fact that there are many gaps in our information about the market. Information, like negotiating power, is not evenly distributed among the players in the market. This is an area where we can look at ways of ensuring greater transparency and a more open flow of cost and price information from and to all participants in the food marketing chain. At EU level there is a need to give urgent thought to this and to how we might be more active in ensuring markets function well and unfair practices are prevented.

We can all agree on the paramount importance of the European agrifood industry, both in Ireland and across Europe. The European Union must safeguard its production base so that it can meet the future demand of its population for food, feed and bio-energy. While fully recognising that retailers must strike a reasonable balance between granting price reductions to consumers and giving suppliers and producers a fair return, this should not be done at the expense of a viable European agrifood sector. This generation cannot allow the food production base in Europe to be damaged irretrievably so that we end up in future with a huge shortage in the supply of milk and dependent on the importation of milk powder from another continent.

At EU level, all the main support mechanisms have now been activated and we have managed to use these to the maximum possible extent. We have identified areas where there is a need to continue to expand the scope by which these measures can continue to support the market. I will continue to press the Commission to suspend the free-at-frontier price for cheese and to extend the closing date for public and private intervention. If agreed by our colleagues in Europe, these measures will add further value to the measures we have already taken to stabilise the market.

There is a huge political commitment to advance these issues and at the European Council last week, Irish concerns were raised by the Taoiseach. Chancellor Angela Merkel and the Taoiseach both spoke about the particular difficulties facing the dairy industry in their respective countries and throughout Europe. It was important the issue was raised at that meeting owing to the importance of the industry to so many people in all our rural and some of our urban communities. At the meeting of the Council of Agriculture and Fisheries Ministers last Monday, I raised these concerns for the fourth consecutive meeting. The Government is committed to supporting the dairy sector and has not been found wanting in the past with policy initiatives and financial investment. I have every confidence the sector will recover from this current downturn and achieve its fair share of the annual growth in demand for dairy products that is predicted by the OECD and other forecasting institutions.

I am glad to have had the opportunity to contribute to this debate. It is of great importance to our farming sector. At the request of Senators Carty, Coffey and Bradford, I will raise again with the banks the need to ensure an adequate supply of credit is continued to our farmers. The Department and I maintain ongoing contact with the chief agricultural advisers to our main financial institutions. I spoke to representatives of the two main financial institutions very recently and again highlighted to them the difficulties facing the sector at the moment and the need for the banks to be as reasonable as possible in working with the industry through these difficulties. As has been said by all the other speakers, we are in a difficult situation but there will be good days ahead. We have a very vibrant, innovative, active dairy sector in our country. Our processors are doing their research, aided and supported by the State through Moorepark, our institutes of technology and the likes of UCC and UCD. We all know the value of the dairy science department in UCC over many years. There has been a huge investment in research and development over recent years, which has been of great importance to the industry.