Thursday, December 26, 2019

Nearly half of Kiwi greenhouse gases come from farming

Caroline Saunders, the president of the Agricultural Economics Society writes in its latest newsletter: 'Climate change is impacting on agriculture, both through consequences such as extreme weather events and through major changes in policy.'

'New Zealand [where she is a professor] is in an unusual position with 48 per cent of its greenhouse gases coming from agriculture. The New Zealand government has passed a Zero Carbon Bill with zero emissions by 2050. The agricultural sector has until 2022 to show how it will achieve this; otherwise, it will go into the Emissions Trading Scheme in 2025. In the UK, agricultural emissions are about 10 per cent of the total, but the UK also has the ambition of net zero emissions by 2050.

Both countries must work out how to measure the emissions, the point of obligation, the treatment of methane and the methods available to farmers to reduce emissions, and how to support farmers through the transition. There is also the issue of trade and the potential substitution of imports produced with higher emissions (New Zealand has relatively low carbon emission per unit of output).

New Zealand and the UK have strong links and it will be interesting to see how negotiations between the countries address these issues. Given WTO rules, this may be through a new trade agreement and/or through promoting consumer preferences for products with low carbon footprints. New Zealand was the first country to adopt a formal well-being budget in 2019.

Whilst it is early days to see how this will transform policy, it is a step in the right direction. One consequence is a shift in policy thinking to put more weight on the well being of those in the agricultural sector, given the changes mentioned above. A key challenge for the [agricultural economics] profession is to research the distinctive role of government to ensure transitions that consider farmer wellbeing.'

One interesting consideration is how Brexit will affect any future trade agreement which is likely to be sought by the UK. One issue could well be trade offs between financial services (for the UK) and agriculture (for New Zealand).

Tuesday, October 29, 2019

A new type of CAP?

The French Government has supported the idea of a CAP based on creating farmer employment rather than being based on the area cultivated: Supporting farmers jobs

The second pillar would become a set of incentives and penalties with an emphasis on tackling climate change.

Monday, September 16, 2019

New farm commissioner from Poland

With Phil Hogan promoted to be trade commissioner, the new agriculture commissioner is from Poland. Janusz Wojciechowski is a 64-year old Polish politician and has 15 years of experience in European politics, having been elected to the European Parliament in 2004, a seat he held until 2016 when he went to the Court of Auditors.

He has specific experience in agri-politics at European level, having served as the vice-chairperson of the European Parliament Committee on Agriculture and Rural Development for most of that time.

Wojciechowski was nominated as a commissioner by the Polish government after the countries original nominee for this commission, Krzysztof Szczerski, decided to withdraw his candidacy. This was because, as Szczerski explained in the Polish media after it was first mooted that he would be given the agriculture and rural development job, he felt that someone with experience in agriculture would be better suited to the role.

Wojciechowski started his European political career as part of the European People’s Party (EPP), of which his national party, the Polish People’s Party. However, he was dismissed from the Polish People’s Party after leaving the EPP for the Union for Europe and the Nations, a political grouping that is considered more conservative and eurosceptic.

He will face the challenge of dealing with a reduced farm budget after Brexit.

Monday, September 09, 2019

Intergenerational renewal in farming

An interesting report on the challenge of intergenerational renewal in European farming, an important issue given the current age profile: Farm demographics

The report argues, 'farming as occupational choice often becomes a very particular lifestyle choice. Hence, policies to increase the attractiveness of farming as an occupation should consider the fact that it often becomes a lifestyle choice. Several features of this lifestyle choice are considered unattractive, such as the hard work, often isolated occupational activity and the difficult work-life balance. Policies that address these issues can have a positive impact on the attractiveness of farming and thus enable intergenerational renewal.'

The report recognises that the increasing capital intensive nature of farming raises financing issues for those that do not inherit (and inheritance raises often difficult succession issues). In the UK the reduction in county council tenancies has reduced the availability of one entry route.

Farmers back no deal Brexit

A surprising number of farmers back a no deal Brexit given that many of them would suffer financially as a result. At least that is the case if one believes polls from Farmers Weekly. A health warning is always necessary about these polls as respondents select themselves and the Ns are often small. A poll which purported to show that a majority of farmers backed Brexit in the referendum has nevertheless embedded itself in the public mind.

43 per cent of 'about 300' farmers said they would be happy with a no deal Brexit while 57 per cent said they would not. Concern about leaving without a deal was strongest in Northern Ireland, Scotland and Yorkshire and Humberside. Optimism about farm business prospects is at its lowest level since the survey started a year ago.

A snapshot 24 hour poll found that 53 per cent would choose to leave the EU with no deal if they could vote again. 38 per cent said they would vote remain and just 9 per cent said they would back the withdrawal agreement backed by Theresa May.

It is interesting that the first poll is below a story about the impact of a no deal Brexit on the sheepmeat sector. About one-third of the UK's production of lamb is exported and 95 per cent of this goes to the EU. 40 per cent tariffs and regulatory barriers would almost wipe out exports.

The Government has ruled out culling as a response to such a crisis. It looks as if they favour a combination of a headage payment on breeding ewes and a slaughterhouse premium. The UK breeding flock already reduced by about 30 per cent in the 2017-18 breeding season as farmers responded to an uncertain future.

Mike Gooding, director of Farmers' First, one of Britain's biggest lamb exporters, told Farmers Weekly: 'Essentially, Brexit risks excluding UK produce from the EU market. A no-deal Brexit would result in the same outcome - but with that risk greatly increased.'

He predicted a substantial fall in sheep farming in the UK. 'My own personal view is that there will be far fewer farmers managing what sheep there are in larger flocks - possibly across multiple holdings.'

Tuesday, July 23, 2019

The New Zealand experience of removing subsidies

Caroline Saunders, the current president of the Agricultural Economics Society, writes about the experience of removing subsidies in New Zealand in the organisation's latest newsletter.

'New Zealand famously removed all subsidies to agricultural producers as part of its post-1984 reforms. Prior to those reforms, New Zealand (NZ) had a relatively high degree of regulation throughout its economy. With a change in government in 1984 accompanied by an exchange rate crisis and a looming fiscal crisis, NZ undertook widespread liberalisation.

The pace and extent of the reform programme was impressive (Paul Dalziel, New Zealand’s economic reforms: an assessment. Review of Political Economy, 2002). In summary, NZ removed all financial controls, floated its exchange rate, undertook major privatisation of state enterprises, relaxed labour market controls, and removed most import tariffs and regulations.'

'The agriculture subsidies were relatively short lived. Until the mid-1970s, support levels were relatively low. However, the introduction of Supplementary Minimum Payments (SMPs) in 1978 – a form of deficiency payment that favoured the sheep breeding flock – followed swiftly by a raft of other measures, marked a rapid escalation in support levels. These measures included: incentives for land development; concessionary livestock valuation schemes; preferential credit for farm purchase; tax concessions; and fertiliser subsidies. Most were phased out in 1984, with some transitional arrangements persisting until 1986.'

'The main impacts were a drop in sheep production and increases in beef and dairy. Farm incomes for beef and sheep farms fluctuated from NZ$23,000 in 1983 to NZ$18,000 in 1984, NZ$34,000 in 1985 and $15,000 in 1986 before rising again to around $25,000 from 1987 to 1990. The impact of the reforms on fertiliser use was significant, since fertiliser subsidies had been in existence since 1963. Between 1986 and 1991, fertiliser use fell considerably, from around 2 million tonnes per annum, to around 1.2 million tonnes. The real value of farmland doubled from 1972 to 1982, then falling from 1982 to 1988 by 58 per cent.'

'The New Zealand experience of liberalisation of agriculture offers some useful insights. There were clear changes in land prices and production decisions in response to the changes in incentives. However, some caveats also need to be observed, notably that New Zealand had a relatively simple and short-lived support system and the removal of subsidies was accompanied by liberalisation throughout the wider economy. The impact was felt by those who had changed or bought farms during the period with subsidies, and subsequently had debt that was not sustainable after the prices fell. The changes also happened within a generation, which certainly would not be the case in the UK.'

Friday, July 05, 2019

Why are there more GIs in Southern Europe?

Geographical Indications (GIs) can be seen as a way of giving consumers more information about the provenance of niche food products, but they can also be seen as protectionist instruments. The EU has the most GIs in the world (makes the Americans suspicious) but they are concentrated in the south of the EU.

In the Journal of Agricultural Economics Martijn Hysmans and Johan Swinnen explore this phenomenon. They set out a series of hypotheses for further testing, although some already look more likely runners than others.

Historically, GIs were first developed in the EU wine sector. 89 per cent of wine GI are to be found in the south of Europe, but southern member states also account for 70 per cent of food GIs (excluding wine).

H1 relates to better and more differentiated food in the south, but there is little evidence to support this (and see the discussion of Scotland below). There may be some evidence for H2 that more GIs are to be found in regions with low productivity, leading to protectionist lobbying. H3 is that globalisation may have an effect, although I would word it rather differently in terms of resistance to globalisation by informed consumers leading to a search for authentic local products.

H4 is that the decline of traditional protectionist instruments may lead to their substitution for new instruments. But why particularly GIs?

I found H5 and H6 on spillover effects persuasive. Economic spillover relates to the use of the knowledge and capabilities derived from the development of wine GIs. H6 relates to the political capacity to design successful lobbying strategies.

No Terroir in the Cold? But what about Scotland?

A farm on Sanday in Orkney which, as the name implies, has particularly good topsoils.

Scotland is one of the more northerly places in the EU, particularly in the Highlands and Islands. There are currently 15 GIs in Scotland. Four are cheeses and three are fish products and, of course, Scotch whisky is there. Four are from the northern isles of Orkney and Shetland, three from Orkney. Orkney has a very well organised farming community with its own farming magazine (Orkney Farmer) and was a pioneer in relation to action on the cattle disease, BDV.

One of the products from Orkney that has a GI is cheddar cheese ('Orkney Scottish Island Cheddar') which might often be regarded as a commodity product. However, the cheese has its own special method of production: Our tradition

There has been concern that Brexit might threaten the system of GIs seen as key to the success of traditional food and drink products in Scotland: Scottish Parliament. In particular, there has been concern that a future trade deal with the US might threaten GIs.

Tuesday, June 25, 2019

Trade deal with China offers hope to beef farmers

A trade deal with China that has ended a ban on exports of British beef offers new hope to beef farmers, but also raise broader issues about UK strategy post Brexit.

A ban on British beef exports to China was imposed following the BSE crisis in 1996. The UK-China Beef Protocol is expected to generate £230m of trade over the next five years. China is the world's largest importer of beef. However, it is expected to be 2021 before supplies start flowing.

In the meantime beef prices are at a low level. Large stocks of frozen beef bought ahead of the original Brexit deadline are still feeding into the system. There has been a collapse in the global leather market affecting hide prices.

More significant in the long run is growing consumer antipathy to red meat because of health concerns and the impact of cattle on the environment, particularly in relation to climate change. 'Flexitarians' are a bigger challenge than vegans.

The broader issue is how far Britain wants to move closer to China after Brexit rather than the United States. There are export opportunities, but also broader concerns about human rights, not least in Hong Kong.

UK agriculture and the current political landscape

My presentation to the Geo-Agriculture conference in Beverley this week discussed the political landscape as it related to agriculture. I got it wrong in the preceding year when I forecast an eleventh hour fudged compromise given that EU decision-making was characterised by last minute deals. This would have left many issues unresolved that would have to be addressed during the transition or implementation period, but during that period economic relationships would continue much as before.

Why did I make a false prediction?:

  • An exit decision for a member state could not be fudged like a CAP reform
  • The member states showed more solidarity than I had anticipated
  • MPs were more intransigent than I had thought likely

The Agriculture Bill has been the victim of Brexit chaos. It finished its progress through committee in November 2018 and continues to wait for its Report Stage debate to be scheduled, now over 200 days since it was debated The NFU would like to see more emphasis on food production and food security, help for farmers to better manage risk and periods of poor market returns.

It is important to bear in mind that farm businesses vary considerably and this affects their ability to respond to Brexit. Some of the variations include climate/terrain; soil type; ownership structure: owned, tenanted, mixed (increasingly common).

Resilience enables farmers to withstand unexpected shocks and changing conditions. Farmers are being urged to unite, build resilience and look after one another, but there is a limited record of cooperation in the UK. It can lead to an emphasis on survival rather than adjustment and adaptation.

Farms are reliant on EU subsidies

16 per cent of farm business make a loss, but that is forecast to increase to 42 per cent as basic payments are phased out. Direct payments account for 61 per cent of farm net profits. An accountant who represents 100 agricultural businesses in the Highlands estimates just one would be profitable without subsidy. Average Highland estate receives two-thirds of its income from EU subsidies.

Some farms and sectors are more challenging than others, but enterprises can be well managed in difficult conditions. AHDB/Andersons study found that top-performing farms are generating £50,000 more, on average, than those in the bottom 25 per cent.

Top beef and sheep farms in less favourable areas (LFA) yielded an income of £45,200 a year compared with -£1,600 in the bottom 25 per cent. On lowland grazing systems, the difference between top and bottom was £55,100. The study states, ‘Almost all the determinants of success are down to the individual; the decisions made on the farm and how they are implemented.'


Farmers Weekly sentiment tracker for April shows a continuing upturn in how farmers view their prospects (+3.18). There has been a slight improvement in commodity prices. Even though more see input prices rising faster than outputs, the gap is narrowing. There has been a slight improvement in how they think Brexit will affect their business. Overall producers remain more negative than positive about Brexit with half thinking it will be bad for their businesses, compared with 21 per cent who think it will be positive. Index (1.0 negative, 5.0 positive) has increased from 2.51 at the beginning of the year to 2.66.

It is difficult to get good data on how farmers voted in the referendum or what they think now. The Knight Frank rural sentiment survey (N just 200) shows they are deeply divided (as is the country). 26 per cent want a hard ‘no deal’ Brexit; 25 per cent want a second referendum leading to ‘remain’ (would it?); 22 per cent the EU/May deal; 16 per cent soft Brexit customs union;10 per cent other; 2 per cent, 2nd referendum leading to leave.

How are farmers preparing for Brexit? 51 per cent said they were making not making any preparations, which may not be irrational given the prevalent uncertainty. Top changes: Diversification; more land into conservation; make existing business more efficient; plant more trees; buy/sell land (the 'bigger is better' orthodoxy is being challenged, although there are still economies of scale).

As far as diversification is concerned, most low hanging fruit has been taken. It does require different business skills and capital costs can be high. Popular options include farm contracting; tourism; on farm niche food production (ice cream; yoghurt; cheese); farm shops; storage facilities or office space; leisure activities; eventually the farm can be just a context for the business.

We should not forget that the CAP has been a dysfunctional policy. It was not designed with UK agriculture in mind or contemporary problems. Basic payments have been only tenuously linked to outcomes. Policy instruments were poorly designed and often impact farm businesses without securing desired outcomes. It encouraged intensification of agriculture.

New policies in England

In England current land-based payments to farmers will be phased out over a seven-year period starting in 2021. They will be succeeded by public funding for public goods at the core of which will be the Environmental Land Management System (ELMS). Under the new system, farmers and land managers can enter into a contractual agreement with the government to produce environmental land management plans providing outcomes, for which they will be paid.

The National Audit Office has issued a highly critical report. Farmers will have little time to prepare for participation in a three year national pilot of ELMS, which will run from 2021 to 2024, because Defra is not planning to set out the environmental outcomes it will pay for or how much it will pay until April 2020. This is less than a year before the start of the pilot and when their payments will start to be reduced. Defra has consulted with farmers as it designs the Programme, but it has not provided the necessary guidance to enable farmers to plan how to adapt their businesses or how to work collaboratively with other farmers.

Defra has recently scaled back its ambitions for the level of take-up of ELMS during the first year of the three-year national pilot, from 5,000 farmers to 1,250, but is seeking to increase participation as the pilot progresses. It is not clear whether this lower number in the first year of the pilot will provide sufficiently robust evidence across the range of farm types and locations to inform further development of the Programme. This means that Defra only has two years to test how well ELMS will work at scale.

What the NAO is saying in coded language is that preparation is poor and it could blow up in Defra's face. Defra currently has no plans to test its assumptions about the level of take-up of the new system. If take-up is low, Defra will need to find alternative ways to achieve environmental benefits. Farmers that do not participate may leave farming or replace direct payment income by adopting more intensive farming methods that could damage the environment.

Trade effects

Under a no deal scenario, tariffs would apply to UK food exports (I do not think GATT 24 applies). Fresh lamb carcase and barley exports are likely to feel the largest impact given that the UK is a net exporter The sector facing the most challenges in a ‘no deal’ scenario is sheep meat. Tariffs under a ‘no deal’ Brexit would make exports uncompetitive, the sector is very reliant on exports to the EU.

There is concern about terms of trade agreements with third countries (the focus is often on the US, but there are problems elsewhere). Agriculture may be sacrificed for gains in other areas of the economy. There is concern about price competition from countries with lower standards, e.g., on animal welfare. But some countries are simply more price competitive.

The AHDB suggests that critical to doing things better on farms is to minimise overhead costs. Higher outputs account for 10-30 per cent of higher profits in top quartile farm businesses, but lower costs contribute 65-95 per cent. Farmers should set goals and budgets (business plan); benchmark; improve people management; be self-critical and use skills effectively.

It is difficult to say what the future holds. A no deal Brexit would be damaging. Perhaps Boris could deliver a compromise that he could get past the hard line Brexiteers, but the chances aren't good.

As far as the EU are concerned, the negotiated deal is one between the EU and the UK and it won’t be re-opened. Why would a different PM be able to persuade them otherwise? They will not abandon a small peripheral member state like Ireland. They don’t want to encourage others to exit.

A no deal Brexit is not in the EU’s interests, particularly Germany. There is scope for further negotiation on the political arrangements. It might be possible to offer a timetable on the backstop and alternative arrangements. The changing dynamics of the Franco-German relationship is the biggest uncertainty.

In questions, I was asked if I would advise sheep farmers to bail out now, given that production decisions need to be taken well in advance. My advice on balance was to hang in there.

I was asked how the attitude of banks and other finance providers might change. This is something I have researched in the past. The attraction of agriculture for lending is that it has been a stable sector with asset security. This will change to some extent after Brexit, but banks have considerable understanding of the sector and will be able to make informed decisions about future lending.

Brave new world in farming

Beverley: Max Perris of Crawford and Company gave a fascinating presentation on the technological frontier in agriculture at the Geo-Agriculture conference here today. I will deal with what he had to say about robotics below, but his overall theme was that there is going to be more technological change in farming in the next twenty years than in the last two hundred.

He forecast that by 2040 only forty per cent of protein would come from animals produced for meat. Insects would become important as they offered protein, well balanced nutrients and were high in fibre along with low carbohydrates. We had a sample of crickets on our table. I must say they reminded me of the fried wasps I was offered as a delicacy in a remote part of China: fortunately my driver ate them. But attitudes could change. The Guardian reckons that the 'yuk' factor could decline: Fashionable food of future

Vertical farming using hydroponics offered many possibilities with the speaker referring to an operation under Clapham Junction in London. The produce was non-seasonal, there were fewer food miles and uniformity of product was achievable. However, the initial capital cost was high and it was important to get the lighting right. One could produce crops like salads and tomatoes but not wheat.

Risks included machinery breakdown with replacement parts having to be sourced from abroad. If there was a fire, debris removal would be costly. I wouldn't like to be one of the troglodytes that worked there!

What are the pros and cons of robotic milking?

Some dairy farmers see this as a way of 'Brexit proofing' their businesses. It is. however, a relatively expensive solution and one more appropriate to larger units. It requires a different style of working and presents new animal welfare challenges.

As far as cost is concerned, a farmer would need one unit per 55 low yield milkers. Each unit costs £100k - £120k and a new shed may be needed as well. So a farm with 100 milkers, not a particularly large farm by today's standards, would need to invest £300k. This would be spread over 15-20 years with bank borrowing, but units typically have a life of 10-15 years.

EU productivity grants have been available which cover 40 per cent of the capital cost, but I am uncertain whether these would be available after Brexit, although they would be consistent with a technology oriented investment strategy. No one knows what will happen to the milk price over the next decade, but I would be surprised if it went up in real terms.

With a robotic unit the cow is typically asked to find her own way to the milking unit and milk herself. This necessitates training for the herd person and the cow. It is important that there are no obstacles in the way of the cow, hence the need for a new shed in many cases. The cow will need access several times a day during an unhindered and uncomplicated route.

Staff need to be available 24/7 as the units send out alerts if there is any kind of problem and they need to be able to sort out software glitches. We all know how IT problems can drive us crazy, especially in the early hours of the morning. Staff need to learn new skills.

It does imply a new way of working with less repetitive work: being in a traditional herring bone parlour with cows urinating in all directions can be challenging. However, farmers need to think through how well they would adapt to this new technology and about its impact on impact on animal welfare, potentially positive but with new challenges.