Islay Creamery
We have received a letter from Alison J Hay, the leader of Argyll and Bute Council, which states:
"At a meeting of the Council on 30 March 2000, the closure of Islay Creamery was discussed and the following motion was passed:
‘The Council expresses its extreme concern at the closure of the Creamery on the island of Islay and calls on the Scottish Executive to fully examine the situation and to give every possible assistance to those affected. The Council also requests the Rural Affairs Committee to visit the island, as a matter of urgency, to assess the impact the closure will have on the local economy and the sustainability of the island.'
I should be obliged if you would give urgent consideration to this and contact me with a view to arranging a visit as soon as possible."
I thought it appropriate to include this matter on the agenda.
At this point, I invite comments on the letter from members of the committee. Would the Minister for Rural Affairs like to begin by telling us what has happened so far?
Thank you, convener and members of the committee. I am very pleased to have the opportunity to join you in the discussion of this very sad event. There is no one on the committee who does not share the concern of Argyll and Bute Council about the difficulties that this closure announcement has caused. We understand that on a small island the closure has implications not just for those employed directly by the creamery and the seven dairy farms that are affected, but for the community as a whole.
It is worth pausing to reflect on the history of this case. It has been recognised in Islay for a long time that without the creamery there is no market for the island's milk, as the high cost of transportation makes trading with the mainland not viable. That is why the Scottish Executive and its predecessor, the Scottish Office, backed the two plans to revive the creamery, one in 1996 and one towards the tail end of 1999 and into 2000.
When the creamery closed in 1996, the island farmers were to be congratulated on taking the bold step of forming their own company and raising considerable amounts of cash to run the creamery themselves. Highlands and Islands Enterprise was able to provide a development grant of £200,000, with preference shares in the company. The new company was also awarded a processing grant of £180,000 by the Scottish Office. A further £65,000 was made available for the appointment of a marketing manager, and £11,000 was provided from the Highlands and Islands agricultural marketing scheme. With the investment by the farmers themselves, that public funding of £456,000 allowed to the creamery to reopen.
As the committee is probably aware, the initial success and fairly healthy cheese sales were not sustained, and those circumstances, coupled with the general fall in the value of milk products, resulted in the company's financial difficulties early last year. As the committee will further be aware, production was temporarily suspended in November 1999. However, there was no immediate consequence for the community because Scottish Milk stepped in with financial assistance to transport the milk off the island at no additional cost.
At that time, several things happened. There were concerns that it was not enough just to raise finance and that a business plan had to be put together. A rescue package worth £335,000 was formulated by Argyll and the Islands Enterprise with a combination of grants and loans from the local enterprise company, the Scottish Executive and HIE; furthermore, the banks and Scottish Milk took a position, and an additional £75,000 was invested by the farmers.
Central to the business plan that underpinned the rescue package was the need, recognised by the marketing people who had examined the situation, for the creamery to make an additional high-value product. As a result, at the start of the year, the creamery began to make a mature cheese in addition to its traditional Islay Dunlop. Unfortunately, margins on the traditional cheese sales did not improve and, perhaps worse, the plan to introduce a mature cheese simply did not work out. The company continued to make unsustainable losses and, as we know, on 21 March the farmers, in their capacity as directors of the company, unanimously took the painful decision to cease cheese production and to close the creamery.
Our first question was whether the plan could be revived; however, the business plan had failed to deliver and our understanding was that no one with any experience in the industry could see any viable future for the creamery. As a result, and given the costs of transportation and the fact that the market for local milk had closed, it was clear that dairy farming on the island was unlikely to survive.
Faced with that fairly catastrophic situation, the Executive wasted no time in trying to find a way to give assistance. We immediately examined how to take Islay out of the southern isles milk quota ring fence and a consultation paper, which we are required to issue, was published on 24 March, seeking views on that proposal. Now that the consultation has been completed, it is clear that most interested parties favour the island's removal from the ring fence, and we will proceed with that. The advantage is that the farmers' milk quota can be sold on the open quota market, which will realise more cash than in the restricted ring-fenced market. The Islay farmers currently hold about 3 million litres of milk quota, which is worth about £600,000 on the open quota market. Although milk quota is relatively cheap at the moment, its value could well rise as the quota progresses—that is a fairly normal cyclical pattern.
Furthermore, we have been in touch with Argyll and the Islands Enterprise, which has been active in taking steps to assist the local community. It set up a local response team to assist people who lose their jobs because of the closure. It offered advice on benefits, employment, training and business opportunities, and it planned a programme of further assistance for the whole island. In conjunction with the Executive, AIE has also made experts from the Scottish Agricultural College available to people who might wish to diversify within agriculture, but who clearly require some assistance to do so.
As I said at the outset, I share everyone's disappointment that the company had to close and am well aware of the serious consequences of the closure. However, we invested considerable sums of money in the venture. I must stress that the business plan proved impossible to deliver and, in the absence of a viable alternative, the directors and shareholders had no other option but to close the creamery.
Thank you very much, minister. I am sure that you are well aware that the matter raises two issues. The first is the current circumstances on the island, which you have addressed in great detail, The second issue that springs to mind is the longer-term lessons that can be learned. Do you feel that the Islay experience offers any lessons that could be beneficial to any circumstances that might face the Campbeltown, Rothesay and Arran creameries?
I am nervous about running those three creameries together. I am well aware—as is the committee—that the immediate financial pressure on those creameries comes from the Scottish Environment Protection Agency's requirements for the disposal of whey. However, I would draw a distinction. One of the more vexing elements of the Islay creamery situation was the fact that, when the business plan was put together, there was real concern about the long-term market for the quality, flavour and type of cheese that was produced. A McLelland & Son, which became a shareholder in the venture, expressed grave reservations about whether there would be a serious market for that cheese. However, I understand that the market for the Campbeltown, Bute and Arran cheeses is far more securely based.
I should mention in parenthesis that I was with the chairman of Safeway Stores, which has accepted Campbeltown cheese on to its main listing and promoted it as a mainline product. One of the cruel aspects of this situation is that, although the business plan makes clear the importance of this kind of venture to an island community, the product must finally have a market.
Although the dairy herd is important to the island, it is substantially smaller than the beef or sheep herds. It is perhaps a little early to talk about learning lessons, but we might want to examine aspects such as marketing and the business prospects for a product.
This is clearly a very important matter, which is why the minister is attending today's meeting. Although I do not have too many background details on this issue, it is clear that many wider issues and pressures are affecting the dairy sector. To what extent is the closure of the creamery a result of such wider pressures as opposed to pressures that are unique to islands?
To answer that question, I have to return to my earlier comments. Reservations that were expressed when the business plan was drawn up pointed to a specific pressure on the medium to long-term viability of the product. Such viability was questioned by the report, which is why cheese experts suggested to the creamery that a more mature cheddar might better sustain itself in the market. However, if the difficulty lies in the fact that the product is not being well received in the market, the situation is not at all helped by a general reduction in price, which means that less income is being taken whatever volume is being produced. Furthermore, I rather suspect that island creameries are faced with fairly fixed overheads, which only exacerbates the situation.
I spoke to some of the people from Islay. One of their requests was to be able to buy or obtain a quota for beef farming in order to replace the dairy herds. That would do something for the farmers on the island. Is that matter any further forward?
There is an unfortunate complication with that. As part of the Agenda 2000 reforms, the United Kingdom as a whole was required to reduce the amount of available suckler cow premium quota. That has happened in two stages. The surplus quota that existed at the end of last year was in effect frozen, so we start from the position of having none available.
We are also required to make further reductions. We have done some work on that—it means a reduction by perhaps up to 4 per cent this year on existing farms. As a result, no national reserve is available for distribution. Farmers who leave dairying can apply for an allocation of free suckler cow premium quota. However, given the ranking of that system, people leaving dairying do not have any priority—the regulations do not provide for that. Moreover, as I have just made clear, there is no real access to that surplus quota. The farmers concerned would be required to purchase quota on the open market.
As you will be aware, discussions are in progress with Highlands and Islands Enterprise and Argyll and the Islands Enterprise, although I do not want to go too deeply into the matter, as it takes us into the dreaded area of state aids. The discussions are about whether there is any way in which farmers could be given assistance—although I dread to use that word, which could fall foul of a state aid—or whether there is any mechanism to help them. At the point at which they might wish to transfer to beef production, the overarching complication of how the suckler cow premium quota rules have been rewritten unfortunately makes things quite difficult. They would still be able to go into the market on an open issue, but that might be more difficult, given their financial circumstances.
I refer to the letter from Alison Hay, leader of Argyll and Bute Council, to the convener. Have you seen a copy, minister?
No.
She asks us to do two things. First, the council
"requests the Rural Affairs Committee to visit the island".
More important, she states that the council motion passed on 30 March
"calls on the Scottish Executive to fully examine the situation and to give every possible assistance to those affected."
Does the minister feel that every possible and available assistance has been given to the people affected?
I can certainly assure you that officials have been to the island and that we are in touch with all those involved at every level, including Argyll and the Islands Enterprise and Highlands and Islands Enterprise. We are therefore well aware of the situation.
As I said in answer to Rhoda Grant's question, we have explored whether there are any ways in which to give assistance in relation to the suckler cow premium. Similarly, we spent quite a bit of time examining carefully whether, at the outset, there was a basis on which the original business plan could be resurrected.
We have been careful to ensure that, as well as the assistance offered by Argyll and the Islands Enterprise, those engaged in the cheese industry have also had access to help from the Scottish Agricultural College. As for the things within our gift, I am perfectly satisfied that we have tried in every way possible to assist the people directly affected by the closure.
I note your comments about the quota being allowed to be disbursed elsewhere—in other words, the removal of the ring fence from Islay. Have you plans to do that in other sectors, such as the sheep sector, given that some of the people involved are suffering liability? I am referring to the HIE ring fence for sheep quotas.
Ring-fencing was, by and large, brought in at the behest of the particular—[Interruption.]
Oh hell—I apologise, that was my mobile.
He is going to ask me a more difficult question now. [Laughter.]
As you are aware, John, the quotas were brought in largely at the behest of specific groups or areas. The previous practice of the Scottish Office—and I see no reason for the Scottish Executive to change this—was to be sensitive to the opinion of local groups. Shetland wishes to have its beef quota removed; Orkney does not. Those were two separate ring fences; we listened to the requests from the farming communities in those areas and, having taken soundings and opinion from them, we acted accordingly.
The Scottish Executive rural affairs department has no closed or rigid view about the matter. We intend, I think correctly, to respond to the wishes of the whole community. Communities have to inform themselves about whether, at a given time and place, and given the value of quota, their internal arrangements are affected or whether they are in a better position—and they have to decide what the long-term consequence will be. You will know better than I do that other factors have to be considered.
I am intrigued about the response from the rural affairs department if there is to be such a closure. Clearly, the department is very busy now, given the state of the various sectors of rural Scotland. A closure such as the one on Islay has a disproportionate impact on the local economy and community. Does the department have a fast-response strategy for such closures? Does it send a delegation to speak to the local community?
I do not know about a delegation, but we had officers on the island early on, as soon as we heard about the difficulties—I think within a day of the closure. When the creamery's action was suspended, officers were on the island within a day of the prospect of the actual decision to cease production.
Our immediate action was to consider whether there was any way in which to resurrect the business plan. We were influenced by the views of the experts in cheese production about the unfortunate combination of factors, particularly the lack of market penetration.
We were also in touch via our local area office. The officers and offices out there are in touch; the closure did not come as a surprise. We knew that there were difficulties and we were trying to assist. We must remember that this was a private enterprise. There is a point at which its owners run it and a point at which we see what assistance the Government can provide.
I note the suggestion in the letter from the leader of Argyll and Bute Council that the Rural Affairs Committee should visit Islay. Do you have any plans to make a visit?
Yes, I have. I do not intend to go immediately—that is, either today or tomorrow. Now that I have had to accept—regrettably and reluctantly—that there cannot be a prospect of revising the business plan to keep the creamery viable, I want to allow the people in the Argyll and the Islands Enterprise team and my officers to take stock of the exact extent of the problems. Rather than just going there to be sympathetic, I would like to be in a position to know what positive action might have to be taken.
People want to know our position following our examination of the alternatives—lifting the ring fence or the possibility of providing assistance in relation to the suckler cow premium quota—and what prospects there are for people moving into various areas. It would be helpful for me to assess that before deciding whether there is any way in which the Executive can give positive assistance.
As there are no further comments, we will now deal with the requests in the letter. The one on which we can act immediately is the request from the council for the Rural Affairs Committee to visit the island as a matter of urgency, to assess the impact that the closure will have on the local economy and the sustainability of the island. Members may want to visit Islay as a committee. If not, do members feel that it would be appropriate for a delegation of committee members to go to the island?
Could not the convener act on behalf of the committee and go to Islay for us?
I would be pleased to do that. Does anybody else want to visit the island?
I would be interested in going. It is important that more than one committee member goes, as much for the signal that we want to give to the people on Islay as for any other reason. I will understand if the whole committee does not want to go; it is quite a distance for everyone to travel. Nevertheless, a few of us should try to go.
Would anybody else be interested?
I support what Rhoda said. If only the convener went, that would imply that there was not much concern among members of the committee. We know that that is not the case, but that is what would be implied. A sizeable representation of the committee should be sent.
Would you be able to go, John?
Yes.
It would also be appropriate to inform and try to involve the local member, as is usual.
Would we be able to build that trip into our investigation into employment patterns in rural communities?
Yes. We could learn significant lessons from the visit in relation to that investigation.
We should certainly send a delegation from the committee.
Does the committee think that the members who have volunteered are the appropriate ones to send?
We should send an SNP member as well. Would Richard Lochhead like to go?
I have no objection to going along, if it is felt that we should send a cross-party delegation.
That group will have to work together to find a suitable date. The suggested dates that fit into our programme are Friday 2 June and Monday 5 June. I will not ask members to comment on those dates at this point; we will contact you individually about them.
As there are no further comments on the letter from Argyll and Bute Council about the Islay creamery, I thank the minister and his support team for coming along and I adjourn this meeting for a few moments, to change the seating arrangements and to bring in a mixed group of witnesses.
Meeting adjourned.
On resuming—