Rural Development Committee, 18 Sep 2001

Meeting date: Tuesday, September 18, 2001

Official Report 429KB pdf

---

“A Forward Strategy for Scottish Agriculture”

Our main business of the day is oral evidence on our inquiry into the Scottish Executive's "A Forward Strategy for Scottish Agriculture". Our original agenda has been slightly changed to bring forward into the morning our discussion on the fishing vessels decommissioning scheme. We had to do that because some of our witnesses were able to give evidence only in the afternoon. I hope that members will forgive us for having to make that change.

It is timely to remind members of the inquiry's terms of reference:

"To identify whether the Scottish Executive's Forward Strategy on Agriculture, published on 26 June 2001, sets out the vision and level of commitment that is necessary to develop a prosperous farming industry, sustainable rural communities, and environmental protection and enhancement."

Bearing that in mind, it is my pleasure to welcome our first witness. Donald MacRae, as I am sure everyone knows, is the chief economist from Lloyds TSB Scotland. Today, he is here in a private capacity and is not necessarily representing the views of his bank. At his request, his written evidence has been circulated to members only.

I hope that members have brought with them the written submissions from those who were invited to give evidence, including those from whom we will hear today. Some of those who submitted written evidence have communicated their disappointment that they were not asked to give oral evidence. I endeavoured to placate them by replying that that does not mean that their evidence has not been taken seriously—indeed, we may go back to them at a further stage for oral evidence, should we wish to do so—and I thanked them for their written evidence.

I emphasise that time is limited and ask members to keep questions as short and concise as possible. We will hear from our next witnesses, who are from RSPB Scotland and Scottish Environment LINK, at 10.30 promptly. I welcome Donald MacRae and invite him to make a brief opening statement to help stimulate the discussion.

Good morning, ladies and gentlemen. I take full note of the convener's comments about time. I will say a few words first about the industry in general and then about the strategy and my submission.

Agriculture is important for three main reasons. First, from the point of view of food security, no nation on earth wants to be entirely dependent on another nation for its food supply. Secondly, agriculture provides the raw material to the food processing industry. For example, Scottish Enterprise has a food-and-drink cluster and that sector is ripe for more development. Thirdly, agriculture supplies non-food goods. In particular, farmers have a countryside stewardship role.

Scotland has had a proud record in agriculture from the first ever reaper, which was invented in Scotland, all the way to Dolly the sheep. Such developments also create change in the agriculture industry itself.

Where are we today? I suggest that the common agricultural policy has failed. Farm incomes have halved in recent years and, in its present form, the CAP is fundamentally unsustainable and costly. For every £1 of output of the agriculture industry in Scotland, 41p comes through support. That is about £39,000 per farm business.

Due to the impossibility of applying the CAP across the new entrants to the European Union, the CAP is also due to change. From a Scottish point of view, agricultural policy is very much determined by the CAP. One therefore has to lobby through Brussels for that change, but that does not mean that the Scottish Executive and the Scottish people cannot influence how the CAP can change.

Why has the CAP failed and not achieved one of its main objectives of maintaining incomes? People have a finite demand for food, which means that as income increases, a declining percentage of their income is spent on food. However, one of the important reasons for the failure of the CAP is that costs adapt to fit and exhaust the prices and revenues. I will explain what I mean by that. The subsidies or support that are paid to the industry pass through the farming industry and are paid out in fixed costs on inputs. For any doubters of that, let me give two pieces of evidence. First, when the United Kingdom joined the European Economic Community in 1973, fixed costs went up by about 50 per cent. Secondly, when New Zealand cut agricultural support in 1984, the costs into the industry fell by about 50 per cent over a period of a few years.

To devise from scratch an agricultural policy for Scotland, three major factors would have to be taken into account. First, it would be absolutely essential to help the industry to change to a new policy. Having applied the CAP for all these years and having created that cost structure, one would have to take account of the need to help industry to make the adjustment. It would be impossible to change the policy overnight. Secondly, one must address the inherent instability of agricultural markets, which is caused partly by weather. My suggestion to members—and to CAP policy makers—is that something akin to the UK deficiency payments scheme, or even the American loan-rate system, would be a good basis for starting. Thirdly, policy makers must also take into account the contribution that farming makes to the rural environment.

Let me also make one or two quick points about the Executive's first ever agriculture strategy. I welcome the strategy. It is important that the industry addresses its current state. In my submission, I mention that local management contracts are a good step forward. However, several sections of the strategy need a fair amount of amplification. I did not see any details about the interaction between the agriculture industry and the rest of the Scottish economy or about how internationally competitive we are. What are our strengths and weaknesses? How do we compare, for example, with Ireland or Denmark, which have a high proportion of co-operative farming? How do we compare with France, which is the powerhouse of the EU's agricultural economy? What are the opportunities and threats?

To develop a strategy, it is essential to take account of the need to change the CAP and to recognise—this is an important point—that agriculture is no longer a driving force in the rural economy. The Scottish Executive's own statistics show that, even in rural areas, employment in agriculture as a percentage of the work force is rarely above single figures.

Finally, the implications of the value chain that is mentioned in the strategy are not taken to their full conclusion. Too many margins are being taken from plough to plate and, from the agriculture industry's point of view, those must be reduced. Amplification is also needed on restructuring and on the implications of economies of scale. The industry could produce the same output from a lot fewer businesses. The evidence that is available on the current age structure and the lack of succession and economies of scale should perhaps be part of the strategy.

The CAP must change. We need a lot more work on analysing the competitiveness of the agriculture industry in Scotland. We must be honest about our strengths, weaknesses, opportunities and threats. We need to take a lot more account of the drivers of change, such as the World Trade Organisation talks and the accession of eastern European countries to the EU. Finally, I welcome the appearance of the land management contracts, although there is little detail on how those will be applied.

Thank you for being so succinct and brief. I open up the meeting for discussion from the floor.

It is clear that one of the challenges that is facing Scotland's farmers is to increase profitability. I was interested in your comments about the margin that is too often taken away from the farmer between plough and plate. Who is taking too much of that margin? How do we change that?

Agriculture's share of the margin from plough to plate has probably been declining at a faster rate than just about any other input. Obviously, the chain from plough to plate includes processing, wholesaling and the retailers. Farming's share has been declining. The latest evidence is that of 100p spent on food, farmers get about 15p. A few years ago, farmers' share in such an analysis would have been much higher.

I believe that that chain could be shortened. I do not know whether there is evidence to suggest that one sector is taking too much out of it, but one has to say that five or six food retailers in the UK account for the vast majority of food sales. That seems fairly unequal against an industry that in Scotland is composed of about 20,000 farm businesses. The solution would be to have many more farm co-operatives. At the moment, about 100 farm co-operatives influence about 30 per cent of farm output. Instead of 30 per cent, that figure should be perhaps 60 or 70 per cent. That would be an answer to the problem of scale. It is not so much about one sector unfairly taking advantage of another, but about the sheer inability of smaller farm businesses to relate to a very large business on the other side of the buying equation.

In your submission, you point out that the Executive strategy document lacks comparative data and information about how the Scottish agriculture industry compares with that in other countries. You make specific reference to a number of those countries, which suggests to me that you have a wealth of knowledge about the way in which they go about helping to restructure their agriculture industries. Your submission says:

"Much could be learned by a comparison of agriculture and tourism in countries such as Switzerland and Austria."

You also refer to Denmark's co-operatively based farming structure. Can you tell the committee what precise information it would be useful to obtain from other countries? What lessons do you think we could learn about how we should adapt our strategy in Scotland?

I shall start by giving you some figures. I apologise for quoting figures, but they are instructive. Switzerland subsidises its farming sector at the highest level of any European country. To use the jargon, the producer support estimate is 84 per cent. In other words, for every 100 units of currency that the agriculture industry produces there, 84 units come from support. By comparison, Scotland's PSE is about 41 per cent, the USA's is 22 per cent and New Zealand's is between 1 and 5 per cent, if my memory serves me correctly. That shows the extent of support that is available.

If support for Switzerland's agriculture industry were to be reduced, it would be in a poor competitive state. Average herd sizes are far smaller in Switzerland than in Scotland and the cost to the Swiss Government of maintaining the industry is substantially higher. Support in Switzerland has not worked, just as the CAP has not worked in the European Union. Switzerland's situation gives us an example of what a very high level of support does to the industry in the longer term.

The plus point about Switzerland is that it has a high degree of integration between tourism and agriculture. I believe that that is important in Scotland. As the foot-and-mouth disease problem has shown, there is a close link between those sectors, so agriculture policy should not be developed in isolation.

I strongly suggest that the strategy document should have included some international comparison. I chose Switzerland as an example because it has a high level of public support. Austria has moved from a very high level of support, similar to Switzerland's, down to a level that is more compatible with the EU. It would be instructive to learn how that restructuring took place.

I mentioned New Zealand because it is at the other end of the scale. Before support was cut back, New Zealand's PSE was at about the same level as the EU's is now. Despite all the issues that were raised at the time, over a period of four or five years, the number of agricultural businesses in New Zealand is about the same now as it was before the support structure changed. I am not suggesting that we should follow New Zealand's example, but it is instructive to note that the structure changed, and some might say that New Zealand's agriculture sector is in a much better financial state than it was before the change.

I am interested by what your submission says about the value chain. It says:

"Some mention is made of this in the strategy and the need to shorten the chain but this whole section is of much more importance to the future of the industry than appears to be the case in the strategy."

That is incredibly important. For example, the current welfare disposal scheme for light lambs values those lambs at £10, which is about a third of what they were worth 10 years ago. How could that chain be shortened?

I am told that that £10 is actually £3 up on last year's market price, so perhaps it is not such a low price after all.

Let me explain what I mean by the value chain. If you take an animal from the farm all the way through to retailing, margins are clearly being made all the way along. I would like that to be much more fully explored, so that we can see which sector gets the most out of it. My information suggests that agriculture has been taking a declining percentage of that value chain.

When I say that the chain could be shortened, I am even thinking of the number of trips that animals have to make during their lives. I believe that that number could be reduced. I also believe that having more farmers' co-operatives could shorten the value chain if there were more direct links to wholesalers and retailers. Denmark has a high percentage of farmers in farm co-ops, and a lot of agriculture produce is sold through co-ops. The return to farming is therefore seen as a return from farming and a return from having a share in the processing. That does not happen in the UK or in Scotland, and perhaps it is something that we should be working towards. A policy to encourage co-ops would be beneficial. In Scotland, as I mentioned before, there are around 100 food co-ops, accounting for about 30 per cent of output. In my view, there should be a lot more.

Do you agree that the majority of store producers are very much at the mercy of auction markets?

Auction markets have a good economic purpose, as they establish a price. However, I have always questioned why the animal needs to go through the mart. The mart could create the function of price discovery, as we economists say, without the animal actually moving. The foot-and-mouth disease crisis has probably promoted that, but I think that we need to go much further.

In your written submission, you say that the Executive's strategy document did not really highlight the number of

"farm businesses which produce little output",

or the fact that

"10% of the largest farms … produce 35% of output. Estimates of minimum viable business size could be produced from these data."

What do you think we could conclude from such data? Are you suggesting that we need to face the fact that some farming enterprises are not currently viable and that we should consider using the land in a different way? What would be the consequences of such changes for the population of those rural areas where small-scale farming is keeping people on the land? Would we see population drift away from rural areas?

That is an important issue that was not addressed clearly in the strategy document. I should start by saying that I am a crofter's son, and our croft was 12 acres, so I know a little bit of the family history of small-scale farming. However, we have to accept that technology changes things.

Many farm businesses are kept afloat by non-farm income, which averages £8,400 according to Scottish Executive figures. When added to the farm business profit, that non-farm income is keeping a lot of farm businesses afloat financially. To some extent, the changes are already happening. Agriculture is not the engine of economic activity in the countryside that it once was. It is my view that, if we were to apply economies of scale across the Scottish industry, we could produce the same amount of output with substantially fewer farm businesses. That has implications for all kinds of policy.

I am well aware of the social implications that such changes may have. I suggest that we now have an ideal opportunity to introduce some sort of retirement scheme, which would allow farmers to come out of farming with some capital, thereby adjusting the industry down. It is important to have an adjustment scheme. Clearly, some businesses are not viable from a farming business point of view, and I cannot see that changing with technology. Elaine Murray makes a valid point, and that is a problem that must be faced.

You have talked at length about restructuring and the need for change, and you have highlighted the fact that we could produce the same amount of food from fewer farm businesses. You mentioned a retirement scheme as a possible mechanism for allowing restructuring to happen. What other structures are needed to give good advice to farming families who are trapped? Some families have difficult equity situations and high bank overdrafts, and they need to look clearly at the way forward and the alternatives that are available to them. In many cases, they do not have the skills—or they think that they do not have the skills—to find alternative employment or off-farm employment. What do you think is needed to aid the restructuring? It is not just a case of setting up a simple retirement scheme. I think that there is a need for more than that.

The agriculture industry borrowing figures have been fairly static, although they have increased over the past five to seven years. Of that total, an awful lot of money is borrowed by a small number of very big farm businesses. However, farm incomes are low, as is evidenced by the published net farm income figures—agriculture is probably better documented than any other sector of the economy. We also know that a lot of businesses are being kept in business by the non-farm income, which is also well documented. Many farmers have realised that, which is why they are pursuing the non-farm income.

Each business has to examine its own situation. Farmers have to ask whether they have a future in farming at their current size, whether they could expand and whether there are other things that they could do. I am encouraged by the fact that the local enterprise companies are now taking a greater interest in rural affairs, including agriculture. That is part of the equation that was not there before. I still say that a restructuring and retirement scheme would go a long way to helping some businesses adjust. I also believe that the Scottish Agricultural College could act as a delivery mechanism for the sort of advice that you mentioned. Whether anything more than a restructuring scheme is required, I do not know. I am not convinced of that.

The tables at the back of the strategy document show the performance of various farm businesses. On the cereals page, for example, the output from the marketplace, even for the very best business, is about £500 per hectare, and the total direct subsidy from the state is about £280. That represents well over a third of the income for those arable farms, and I am looking at the best ones—the top 25 per cent. For mixed cattle and sheep, the best performers got a total of £279 per livestock unit from the marketplace, with a direct subsidy of £288. Are you concerned that the document makes little mention of where the biggest percentage of the income for some businesses comes from, or of the longer-term future for that support mechanism? What is the right path for Scotland to follow in arguing for change in the CAP?

I start from the eminently arguable position that the common agricultural policy needs radical change. I fundamentally believe that it has singularly failed in one of its prime objectives—to maintain farm incomes. The evidence is stark. The total support keeps increasing and the income keeps falling. It is proven.

The other thing is that, the way in which the policies are administered—in silos and by product—means that farmers follow the rules and the incentives. That means that they are increasingly divorced from the marketplace. If farmers have to farm in a particular way to get maximum support, it sends the wrong signals to the agricultural business. It concerns me that the level of support is so high in some sectors.

However, very few agricultural industries in the world are not supported in some way. New Zealand is a prime example of that. Even the USA, with its so-called efficiencies, still supports farmers to a high degree. The comparator figure there—the PSE—is 22 per cent as opposed to 41 per cent in Scotland.

I am concerned that the CAP sends out the wrong signals. Farmers are not producing for the marketplace and the CAP does little to encourage the quality of agricultural production. In the longer term, the farming industry must argue for a change to the CAP. There is no future in arguing for ever-increasing levels of CAP support. That is not tenable. The evidence is clear that increasing levels of support do not lead to increased viability.

What should we be arguing for?

We would all agree that we do not have a clean slate, but if we did—

Starting from where we are, what should we be arguing for? There is to be a mid-term review of the CAP in 2003. What should we be arguing for in terms of how Scotland receives support in future?

First, we should argue for a policy that gives a floor to agricultural prices—similar to the deficiency payments system that operated in the UK before we entered the EEC, and similar too to the American loan-support system. The crucial point about such systems is that prices are set at a level that provides a safety floor only; they do not encourage production in the way that the current system does.

Secondly, support should be provided on a whole-farm basis, as the forward strategy suggests, and a land management contract basis, so that the managers of the farms—the farmers—are not led down the wrong path in different areas of production. An example of a wrong path would be the production of lambs many of which were unfit for market.

Thirdly, we must acknowledge the need to pay farmers for their stewardship of the countryside.

There are therefore three main planks to the strategy: stability in the marketplace; whole-farm payments; and acknowledgement of the countryside stewardship role—the non-food role. A fourth part of the equation would be to provide an adjustment mechanism. The system cannot be changed overnight. Agriculture has set itself up to operate within the CAP over many years; it would be completely unfair to change the system overnight. There will have to be an adjustment mechanism over a period of years. Those are the four main strands that should be included in a new common agricultural policy.

Donald, you have set us up very nicely for our discussions today. Without doubt, more time would have been useful but, as I explained, we are very constrained for time. We are very grateful to you. I know that you gave up an important meeting to be here this morning, and we appreciate that. Thank you for your time.

Our next witnesses represent RSPB Scotland and Scottish Environment LINK. I thank them for giving their time to speak at our inquiry. Because we are so constrained for time, I ask the witnesses to keep their opening remarks as brief as possible to allow the maximum time for discussion with committee members. We are grateful for your written submissions, which were very good.

Fiona Newcombe and Duncan Orr-Ewing are from RSPB Scotland. Ian McCall, Jonathan Wordsworth and Lisa Schneidau—I hope that my pronunciation is close enough—are from Scottish Environment LINK.

Good morning, and thank you for inviting us to discuss "A Forward Strategy for Scottish Agriculture" and the committee's inquiry into it. I am the agricultural policy officer for RSPB Scotland and I also convene the Scottish Environment LINK agriculture task force. LINK is the umbrella organisation for environmental bodies across Scotland.

We support the whole of the committee's remit on the forward strategy, because the future maintenance of farming is vital for Scotland; however, we will focus on environmental and social issues.

The three representatives of Scottish Environment LINK represent a range of interests—LINK is an umbrella organisation covering interests such as recreation, conservation and cultural heritage. The three representatives will give an idea of that breadth of interests. I am also on the management team of Scottish Environment LINK.

I would like to ask Fiona Newcombe how the level of funding for agri-environment schemes in Scotland compares with that in England.

The level of support for agri-environment schemes has historically been extremely low and, unfortunately, that continues to this day. We are told that the current funding in Scotland is £30 million a year; in England it is £98 million a year and in Ireland it is £100 million a year. Scotland has a more important and a better environment, so its figure is very low. The numbers of applications that are accepted reflect that low budget.

What changes would you advocate in order to achieve Donald MacRae's third aim—that we should pay farmers for their stewardship of the countryside?

I would advocate several changes. One would be to increase the budget. A second would be to separate the organic aid scheme from the other agri-environment schemes, because at the moment, the former takes the first bite of the cherry and does not allow all the non-organic farmers to access funds. A third important way of making progress would be to change the mechanism of payment away from consideration of income forgone and towards rewarding farmers and crofters for what they produce for Scotland.

I wanted to ask a couple of questions on the written submission from Scottish Environment LINK. The first is on organic farming. The submission contains a clear recommendation that the Executive should support organic food and farming targets. Why is that so vital? What sort of support should the Executive give?

The second question is on training. Your submission talks about ensuring that people who work on the land have appropriate training. Would you expand on what you feel the training priorities should be?

Organic agriculture has many benefits for the environment. It has been shown that organic agriculture in both lowland and upland areas leads to huge biodiversity increases when compared with normal agricultural practice. The leeching rates for nitrates have been shown to be 40 to 50 per cent lower for organic agriculture than they are for conventional agriculture. We can provide a lot of statistics to show that organic agriculture is favourable in environment terms. It is also favourable in rural development terms. We feel strongly that the huge and increasing demand for organic produce across the UK is not being reflected in the growth in organic agriculture. The growth in demand for organic produce is 55 per cent per annum, but domestic supply has grown by only 25 per cent per annum.

At present, organic agriculture is supported by the organic aid scheme, which is increasingly underfunded. Its funds come out of the same budget as those of the increasingly pressured rural stewardship scheme. We feel that the Scottish Executive should offer a lot of support over and above the recommendations that are in the forward strategy, so that a framework can be provided for the development of organic agriculture and so that a target of 20 per cent organic agriculture can be achieved by 2012.

On training, there is a good idea that the committee might feel worth considering. A couple of years ago in England, the Ministry of Agriculture, Fisheries and Food—which has become the Department for Environment, Food and Rural Affairs—set up what were called the Bodmin and Bowland upland trial projects. Part of the remit of the groups involved was to provide one-stop shops for farmers in those areas, so that they could get best-practice advice on how to access advice and information. That included information on accessing grants—not only environmental grants but social grants. That idea seems like good practice.

Donald MacRae argued strongly that the CAP had to be completely and radically changed and that support had to be delivered differently. He highlighted the role of whole-farm management payments and the rewarding of public goods. Does RSPB Scotland feel the same?

Yes, we strongly support the idea of land management contracts. The WTO allows support for what are called green box payments—which are non-distorting payments. The strategy fails to mention such payments and that is a huge hole in the strategy. We would like to see whole-farm planning and regional prescriptions for the environment. It is not possible to have one prescription that suits Shetland and all areas down to Dumfries and Galloway. We would like there to be lots of local advice and training on the implementation of plans.

You point out that the strategy does not the mention the WTO and the green box or blue box payments. What might it mean for Scotland if we do not secure change to the current support systems?

The WTO is putting on pressure to remove subsidies; that is mentioned in the strategy. However, what is not mentioned is that payments may still be made for environmental and social issues that are not trade distorting. I strongly believe that, of the UK countries, Scotland is best placed to make the most of that opportunity. It is strongly placed in Europe to do that. Scotland has a fantastic environment and strong social and cultural set-ups, especially with crofting. It is a shame that the strategy has not taken steps to maximise that opportunity.

Are you saying that that should be regarded as a strong card for Scotland in arguments for change to the CAP, because it will benefit Scotland—probably at the expense of other parts of Europe—if we can secure such changes to the way in which the CAP operates?

Yes, I would argue that strongly.

From its submission, I see that RSPB Scotland has done quite a bit of work on the land management contracts that are operating in France. Can you give us more information on what you have seen in France? How do such contracts and support systems operate and what are their benefits, not only to agriculture but to the whole rural economy?

We saw two examples near La Rochelle. What made the systems work seemed to be that they were organised regionally and were managed by a local chamber of agriculture that included farmers and environmentalists. Each farmer could enter into a contract that deliberately targeted either social or environment goods. It was possible for a co-operative of farmers to enter a land management contract, and that seemed to work very well indeed. The system seemed to deliver good benefits for things such as diffuse river pollution and employment in rural areas.

Did that affect the productive capacity of the farms?

As far as we could tell, it did not seem to.

The witnesses have mentioned that we have underproduction of organic produce and overproduction of other produce. In parts of my constituency, there is great difficulty in finishing off stock, simply because of the climate and the land. Has any research been carried out to discover how people there could take part in organic farming and finish off their stock? If they are selling that stock on, it will not always be an organic farmer that buys it, so the added value that could be there is lost.

The organic agriculture system here is quite fragmented. It depends largely on local initiatives that can be developed. That is why we are arguing for a much stronger framework that covers everything from the farm to the market and ensures that all the systems and all the markets are in place to develop specific Scottish produce. We have to consider European examples where such systems have been successful. If we compare Scotland with those examples, we see how fragmented things are here.

The forward strategy seems to put all the responsibility for the development of organic agriculture on to the industry. We feel strongly that the Executive should take more responsibility.

I will continue on that theme. I am sympathetic to the view that the organic aid budget must be separated from the other budget. However, I am not aware that any application to the organic aid scheme has been refused; it is other schemes that tend to get refused. My gut instinct is that development of organic farming must be market-led and demand-led, rather than policy-led, which is what you seem to suggest. Organic farming must be led by public demand and that requires a premium in the marketplace. Although I have no doubt that a large sector of society is happy to pay a little extra for organic produce, I feel that that must be the only driver and that it cannot become a legislative process. What are your thoughts about that?

We need a policy framework as well as a market driver for organic agriculture. One of the current concerns is that there is a five-year incentive under organic aid, but there are no follow-on payments to acknowledge that prices of organic produce and premiums will change over time. Those extra payments are accommodated in other European countries, so we must think ahead. In some respects, purely being at the mercy of market forces will not necessarily develop the system in a co-ordinated way, which is the framework that we argue for.

In the submission from Scottish Environment LINK, you suggest that the Executive should increase modulation to 20 per cent. Will you comment on that? I suspect that it is a contentious suggestion in some areas.

You are also members of the rural dialogue group. I note from that group's submission that the Scottish Executive does not make adequate use of the rural development regulation and that it is not co-ordinating rural development policy with agriculture policy sufficiently well. The rural dialogue group's document makes the point that perhaps the strategy lacks a vision of why we support farming in Scotland. Will you comment further on how you see the link between agricultural policy and rural development, and how we might better use the European Union rural development regulation?

Currently, modulation is at 2.5 per cent, rising to 4.5 per cent by 2006. That money goes largely into agri-environment, but there are other options. That is a huge underfunding compared to demand. For example, the agri-environment budget for this year is £30 million and we understand that rural stewardship applications alone come to £28.5 million. At current estimates, perhaps not even 10 per cent of those applications will get through.

There will be a lot of disappointed farmers out there who want to make a difference to the environment, but who will not be able to through that scheme because the agri-environment budget also includes organic aid, current commitments under the environmentally sensitive areas scheme, and the previous countryside premium scheme. The current modulation and the pound-for-pound match that the Westminster Government contributes are not enough, even for agri-environment.

On the wider rural development regulation schemes, only a huge increase in modulation will meet the potential that is available now to the Scottish Government to make those changes.

On the wider rural development regulation issue, there is a lot of scope for developing more incentives and support to integrate agriculture into the wider rural fabric of Scotland. However, there must be a much more inclusive process that involves a far wider range of stakeholders in rural Scotland. We encourage the Executive to review the rural development regulation after the first year and to consider some of the article 33 clauses, for example, that were missed out in the original plan. The Executive should revisit those and consider the potential for helping rural Scotland and its agricultural systems.

How do you think that you can win that kind of argument with traditional farmers who regard modulation as money that is owed to them being given to other people?

It is difficult because, at the moment, modulation in the UK is applied proportionally to all farmers, whereas the spirit of the rural development regulation is to take funding from bigger farmers—who will benefit more from subsidy—spread it more evenly and direct it towards the environment and rural development agenda. We encourage the Executive to consider the way in which modulation is applied to Scottish farmers, as well as the amount.

My point is similar to Dr Murray's. You say that only payments to farmers for green schemes are acceptable to the World Trade Organisation. At the same time you say that the rural stewardship scheme is massively oversubscribed and that it is the vehicle for the green schemes. At the same time, modulation top-slices a lot from farmers' subsidies. How are farmers meant to comply with your wish to see farming continue environmentally in the Highlands if they simply cannot get the money?

We support modulation, but we support modulation that goes back to farmers through different types of schemes—through the green farming schemes—instead of through production schemes. We want modulation and land management contracts to prepare farmers for the change that is coming in the way that they are supported. There will be no ducking that change—it is coming through.

I see green farming schemes working on a farm-by-farm basis. I have not visited a farm or a croft where a farmer has not been extremely proud to show me some aspect of what he or she is doing that is good for birds. Farmers are developing those aspects to suit their farming conditions. We want to see the introduction of mechanisms to facilitate that.

You have argued succinctly that there must be a big increase in agri-environmental budgets. One of the mechanisms for which you argue is the further use of modulation. Can you explain why we in the United Kingdom find ourselves in a position such that this year's total agri-environment budget for Scotland is £30 million whereas the Irish budget is £100 million for a country that is identical in size? What is the reason that we find ourselves short-changed on Westminster funding?

My best understanding is that those funds are allocated on the basis of historic spend. As Scotland has always had a low base for spending on agri-environment schemes, it is short-changed in that way from the European Commission.

I do not understand why Scotland's allocation is so low in the UK. That is the case not only for agri-environment schemes, but for the less favoured areas support scheme. Scotland receives 60 per cent of what England receives per hectare of less favoured area from that budget. To my mind, it should be the other way round, given the situation in Scotland.

Are you saying that if we want organic production to grow, proper funding to be put in place for the rural stewardship schemes and agri-environmental payments to grow, Westminster must contribute here as well? There has been an historic underfunding in Scotland since 1992 when the common agricultural policy was first reformed.

Westminster must contribute, but it is also in the Scottish Executive remit to contribute.

The money must come from somewhere. I agree that agri-environment schemes in Scotland are underfunded, especially in relation to those in England, and I also agree that the less favoured areas scheme should be exactly the same.

The issue of where the extra money comes from is difficult, but do you agree that a possible source could be diversion of the money that is spent by Scottish Natural Heritage, given that some of its budget is used to make payments to support farmers in environmental matters of all sorts? Do you agree that there is far more scope for SNH to use some of its substantial budget to support green environment measures and to pay farmers for their stewardship of the environment?

Even if one took all SNH's budget and put it into the current agri-environment spend, it would not be enough. Scottish Natural Heritage has a remit to support the designated areas, which it is now starting to do. We want that support to continue. We must look after the jewels in the crown of Scotland.

We must deliver a message to farmers by examining the whole Scottish Executive environment and rural affairs department budget and directing it more towards green farming schemes to help to prepare for the change that is coming.

I accept that argument, but do you agree that one of the means by which SNH can ensure stewardship of the environment is to support directly farmers who are engaged in the stewardship of the environment—not in offices, but working on the land to ensure that we can continue to enjoy and take for granted our beautiful landscape?

I agree that SNH should continue to support the designated areas, but it is SEERAD's budget that must start to move from production to the environment.

We would like agriculture to be as multifunctional as possible, which means that agriculture should reflect not only its products—it is based on productivity at present—but social, environmental and economic objectives as the three-legged stool of sustainability. We want environmental objectives to be integrated into the way that agriculture is considered in Scotland. In that respect, environmental improvements should be funded by a central SEERAD fund, as are social and economic improvements, rather than by a separate environmental fund that removes integration.

A few days ago, the committee shut itself away for a couple of days to discuss where it wanted to go over the next two years. One of the phrases that we often use is "integrated rural strategy". However, when we thought about it properly, we concluded that nobody has defined that phrase. Perhaps there is no definition. Do you think that the forward strategy for agriculture adequately refers to an integrated rural strategy or do you think that improvement is needed?

In our responses, we have not touched on social products from agriculture. Donald MacRae pointed out earlier that foot-and-mouth disease illustrated how dependent other areas of the rural economy are on having an open and welcoming countryside. The strategy identifies that tourism and recreation are important, but it does not provide a vision of how the strategy can help the tourism industry, for example. That is a gap that should be addressed. Some of the available opportunities have not been explored by the Executive—for example, we heard about the opportunities in article 33 of the rural development regulation.

There are many links between agriculture and other sectors. The forestry strategy, for example, has considered a multifunctional approach more closely. It has addressed more fully how forestry contributes to tourism and to enabling people to access the countryside. The agriculture strategy has not done that until now.

The remit of the forward strategy for Scottish agriculture working group is to examine the impact of the environmental regulation on farming. It does not consider the benefits that the environment could deliver to farming. As was said, Scotland's environment is a great asset—potentially one of the country's best assets. It is difficult to know how the strategy will improve the situation if we ignore one of our greatest assets that could—and is already—attracting a lot of funding into remote rural areas. One has only to consider life projects under the European Union environment fund and SNH's natural care scheme. That scheme pays money directly into the pockets of farmers in some of our most remote and fragile communities.

The historic environment should not be neglected as it has been in the forward strategy. It makes a valuable contribution to the tourist industry in particular.

At this point, we will wrap up this session—we are on time, which is very impressive. I thank the witnesses for their excellent and succinct answers to our questions. We will cogitate on everything that we have discussed today and agree on a route forward. Thank you for your participation.