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(THIS DOCUMENT IS THE PROPERTY OF HIS BRITANNIC MAJESTY'S GOVERNMENT)

SE CRE T

C.P.(51) 80

16TH MARCH, 1951

CABINET

COPY NO.

31

ANNUAL REVIEW UNDER PART I OF THE AGRICULTURE ACT, 1947

Memorandum by the Chancellor of the Exahequer

I have been asked by the other Ministers concerned to report on

the progress of discussion with the Farming Unions and on the position now reached.

Course of the Negotiations

2.

The various proposals were outlined in E.P.C.(51) 17. There have been some slight changes in the figures but basically the position is this. In 1950/51 farm incomes adjusted to normal weather conditions are estimated at £2991⁄2 millions. If costs, prices and production levels remained constant so that this income was repeated in 1951/52, they would be £26 millions in excess of the target income proposed for 1951/52. Increase in costs is put at £871⁄2 millions of which £34 millions have been carried in 1950/51 notwithstanding the high level of income. Towards the remaining increase in costs of £53 millions there will thus be an excess of income at present prices of £26 millions and after allowing for various adjustments the recoupment needed by the farmers is £37 millions. The Agriculture Ministers point out that, on the basis of these figures, which the Farmers' Unions contend should not be the sole criterion for determin- ing price increases (see paragraph 6(a)) the final result would be that, if the farmers reach the target income of £273 millions proposed, they would suffer a net reduction of income of £261⁄2 millions as compared with what it is estimated they will receive in 1950/51. The figures are given in Annex

Our original offer to the farmers was £35 millions before allowing for any withdrawal of the capital injection (see paragraph 3) and disregard- ing a special payment of £51⁄2 millions in respect of the Special Price Review (see paragraph 4). We proposed in the first place to withdraw £20 millions of capital making our net offer to the farmers £15 millions, but we later reduced this capital withdrawal to £10 millions making our net offer £25 millions, All this was done under the authority given by the Economic Policy Committee at their 4th Meeting (E.P.C.(51) 4th Meeting, Minute 1). to the Agriculture Ministers, the Minister of Food and myself.

A.

3.

Capital Injection. In 1946/47 when the agricultural expansion programme was started we added £40 millions to the farm prices by way of a temporary injection to provide some of the capital needed for the expansion programme. Our intention has been to let them have this injec- tion for five years (i.e. £200 millions in all) but we have never had any firm arrangement with the farmers about withdrawal. We are clear that it must be withdrawn gradually and that we should makpaostart this year. We have, however, reached the conclusion that if the farmers are to have £200 millions in all we ought not to withdraw more than £10 millions this

year.

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4.

Page Price Review.

68

Page 68, Following on the wage increases last autumn the farmers asked for a Special Price Review. At that time we undertook to make a special payment in the prices for 1951/52 to cover the additional costs which would be carried by the farmers in 1950/51 if a Special Price Review was postponed. The amount involved is £5/1/

It is quite outside any estimate of recoupment required for 1951/52. It will have to be added to the price of the different commodities in proportion to the way in which increased wage costs fall. It is dis- regarded in, and will be additional to, any recoupment discussed in the rest of this paper.

millions.

5.

Wool. The present guaranteed price which the farmers receive is 2s. 3d a lb.; the wool is selling at about 12s. Od. The surplus less 10 per cent goes into a special fund and is available for five years to meet any future shortfall in receipts by the Wool Marketing Board after paying the farmers the guaranteed price. If there is not sufficient in the fund to meet such a shortfall money has to be voted to implement the guarantee and the Exchequer therefore has an interest in the level of the fund. At the end of five years, however, anything remaining in the fund is paid over to the farmers and the whole process starts again. At the end of this (the first) year there will be about £171⁄2 millions set aside in the fund and we could afford to let the farmers have a guaranteed price of 5s. Od or 6s. Od without any real risk that we should have to vote money to implement the guarantee before the end of the five yearly period. The farmers claim therefore that any extra price we allow on wool is their own money and out-

side price recoupment. On the other hand whatever we allow (from £41 millions to £94 millions - see paragraph 11) is quite clearly income and should be taken into account in deciding what price recoupment on other commodities is needed to achieve a given target income. Of course the less the farmers

get now the more they will have at the end of the first quinquennium and if wool prices remain very high there will be a very big addition to their incomes on the disposal of the surplus, an addition which it will be difficult to fit into the Price Review procedure. It must nevertheless be conceded that it is difficult for the National Farmers' Unions to explain to the individual farmers that a large part of the price recoupment in a year of heavy increased costs is being given in respect of wool which many farmers do not themselves produce.

The Farmers' Case

6.

The farmers have rejected our offer and are asking for £55 millions with no capital injection withdrawal. We think, however, that they will come below this figure. They base their claim on the following grounds:-

(a) They consider that too much stress has been placed on a partic-

ular calculation of farm income: other calculations examined at the review point to a declining trend. All the calculations considered show a declining trend in cash spendable incomes.

(b)

(c)

They challenge as inadequate the allowance of £28 millions made

in respect of increased production of £350 millions since 1946/47 in the build-up of the target net income of £273 millions (see paragraph 53 of E.P.C.(51) 17). They consider that the allowance made is too low by £15 millions.

There is likely to be a further rise in costs during 1951/52 which

the farmers will have to bear and this togethep with any Page 68

afficreased taxation will make it difficult for thereto find the abby 587

necessary further capital investment.

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(e)

(£)

(g)

(h)

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They are already finding it difficult to get the Credit from banks

and merchants which they need. This may be partly the result of the bad harvest last year and, in the case of merchants, the larger proportion of their funds tied up in carrying stocks; whatever the reason it is an embarrassment to the farmers.

The average profit is no more than £800 a farm which has to

cover the remuneration for the labour of the farmer and his wife, interest on capital, further capital investment necessary and the whole of the risk,

Other incomes, including wages, and profits are rising and the

farmers' profits should not be reduced at such a time.

The Government are still asking for an increase of production and

there is a large unsatisfied demand for food in the country. The effect on production of under-recoupment of cost increases will be serious.

We are paying substantially higher prices for our imports of food and should not deny higher prices, based on higher costs, to our own farmers.

The Minister of Food's View

7.

The Minister of Food considers that our present offer of £35 millions (before withdrawing £10 millions capital) is fully adequate to secure the food which the country requires at prices consumers will pay. (We do not want a general increase of production; what is needed is a shift of production from milk into meat.) In general, he points out that the income of farmers is four to five times greater than before the war, although net output is but 45 per cent greater and labour costs have increased only two and a half times; although import prices are rising, the prices of many home-produced foodstuffs especially subsidised foodstuffs are already much higher than those of imported supplies; the gap between the price paid to the farmer and what the consumer pays is already dangerously high and must not be widened; and lastly, we have already to face in the next twelve months the prospect of rising retail food prices by a very substantial amount (see E.P.C.(51) 4).

8.

He emphasises that the global award on food cannot be considered without taking account of its consequences on the price of individual commodities; the breakdown of the award among commodities has also to be negotiated with the farmers. An award of £25 millions net on food alone entails by common consent at least id a gallon on milk and the farmers may well ask for more. Any excess above £25 millions net would also, it is agreed, have to fall almost entirely on milk. This would run counter to the policy agreed at the Economic Policy Committee (see E.P.C.(51) 4th Meeting). Moreover, an award of £25 millions net would enable us to make very substantial increases in the prices of fatstock and pigs (see Annex B); to the extent that there is not a sufficient disincentive on milk, the attraction of these higher prices is reduced.

9.

The offer of £35 millions was meant to include some increase in the price of wool (which we had notionally put at £41⁄2 millions) and the most the Minister of Food feels able to concede is to offer £35 millions (before capitphwithdrawal) on food prices alone, letting the fame69 afsp8have, if they wish it, a price of 5s. 6d a lb. (£9 millions) on wool. This would give the farmers £442 millions before capital withdrawal and is more than

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At this point Ragfe79ref th&7

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Pagid Reefa587

a statistical basis. Minister of Food would stand firm even if it meant a break with the

farmers involving scheduling prices and all the political and other diffi- culties which would follow. He feels that we should have an overwhelming volume of support from the country at large.

The Agriculture Ministers' View

10.

The Minister of Agriculture regards our present offer as inadequate, mainly for the reasons given by the farmers themselves. He points out in addition that once this offer has been translated into increases in the price of individual commodities all that the ordinary farmer will know is that he has been seriously under-recouped for the increase in his costs of production of each commodity. This will be regarded as a very poor reward for all that the farmers have done to increase production of food supplies for this country with, as a result, a substantial saving of dollars. Severe under-recoupment this year will follow upon under- recoupment in each of the last two years and the cumulative effect is bound to have some result on the level of production and completion of the agricultural expansion programme. If an increase in the price of wool is given (even only to 3s. 9d) there will be a saving to the Exchequer of about

£1

millions on the hill sheep subsidy. The Minister of Agriculture shares the scepticism of the farmers about the reliability of the target net income approach as the determining factor in fixing prices. It necessarily assumes that output, efficiency, etc. remain constant, as between the current year and the year for which prices are being fixed, and that the calculations can be made free of all errors of forecast; in a changing world these assump- tions are never borne out by events. Finally he points to the very serious. political difficulties of a break with the farmers, which will undoubtedly mean trouble in the House and possibly a Censure Motion, at this time. The Minister of Agriculture has suggested as a compromise on the Minister of Food's proposal that we might let the farmers have £40 millions (before capital withdrawal) on food prices and as much on wool, between £4 millions and £92 millions, as may be necessary to secure agreement. The Secretary of State for Scotland concurs.

Conclusion

11. Annex A shows the effect of these two proposals on farmers' incomes. The manner in which the offers can be broken down among the different commodities is shown in Annexes B and C, but they are given only for purposes of illustration since our negotiators must be left with some latitude in fixing individual prices with the farmers. We are all agreed that we must now ask our colleagues to decide upon the final offer at which we would if necessary break with the farmers. Our negotiators would lead up to this offer gradually, probably keeping something in hand for Ministers to use if necessary. The question on which we therefore need a decision from our colleagues is at what point do we make this final stand which may involve a break with the farmers and the scheduling of prices. The alternatives for consideration are:-

(a)

(b)

£35 millions (or after capital withdrawal £25 millions) on food

prices with £93 millions on wool.

£40 millions (£30 millions after capital withdrawal) on food prices with as much on wool between £4 millions and £94 millions as Page necessary to secure agreement.

Treasury Chambers, S.W.1,

16TH MARCH, 1951.

Page 70 H.G.

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