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.'

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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.

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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.

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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.'

Brexit

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.

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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.

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Wednesday, June 12, 2019

Pesticide rules could be weakened after Brexit

Concern has been expressed about the way in which EU pesticide rules are being translated into UK law by the University of Sussex Trade Policy Observatory: Not just a technical exercise

The commentary notes, "These changes to pesticide regulation in the UK can hardly be characterised as ‘technical’; they will weaken the rigour of the process by which pesticides are approved and monitored in the UK."

The EU could, of course, prohibit the import of crops from the UK produced with pesticides of which it did not approve.

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Tuesday, June 11, 2019

Farmers divided about Brexit options

Farmers are divided about how or whether they want Britain to leave the EU according to the Knight Frank 2019 rural sentiment survey. It should be noted that the sample size is just 200, but it probably does reflect a measure of confusion and uncertainty among farmers.

26 per cent of farmers wanted a 'no deal' Brexit, which would certainly be damaging for at least some of them, but 25 per cent wanted a second referendum leading to a remain conclusion. 22 per cent backed the deal with the EU negotiated by Theresa May and 16 per cent preferred a softer Brexit including a customs union.

30 farmers said they would change how they voted in 2016 and 80 per cent of them would switch from remain to leave. They blamed Brussels for the UK's inability to reach a deal.

51 per cent of respondents said they had no plans to adapt how they farmed to deal with leaving the EU. Those planning for Brexit envisaged diversification, putting more land in conservation schemes and making existing businesses more efficient.

The report can be read here: Knight Frank

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Sunday, June 09, 2019

Warning on government's new farm policy

The National Audit Office has issued a report on the government's new farming policy. Gareth Davies, the head of the NAO comments, 'Defra is moving forward with a policy which is a radical departure from the CAP farm payment regime we have known for forty years. Because it is such a big change, from acreage-based direct payments to an environmental stewardship scheme, we have looked at Defra’s approach to implementing its policy at an early stage.'

'We urge Defra to give itself time and space to fully test and evaluate the policy, and for comprehensive planning, to avoid any unintended consequences for the farming community, our environment or ability to feed ourselves.'

The report notes that 'The government’s new farming policy will be a significant change for farmers in England and the Department for Environment, Food & Rural Affairs (Defra) has a lot to do to prepare for its implementation at a time when its resources are already under immense pressure from its preparations for EU Exit. The National Audit Office warns that government must approach its roll-out carefully to ensure farmers can prepare in the way they need to.'

'The UK farming industry provides over half of the food the UK eats, employs 474,000 people and comprises 217,000 farms. While a member of the EU, the UK takes part in the Common Agricultural Policy (CAP). Under CAP, farmers in England received €2.4 billion in subsidies in 2017. To prepare for exiting the EU, Defra is developing the Future Farming and Countryside Programme (the Programme) to implement a new agricultural policy and regulatory arrangements to replace CAP.'

'The key part of this new programme is the Environmental Land Management System (ELMS). Defra hopes to have 82,500 farmers enrolled on ELMS by 2028. Under CAP, most payments to farmers are based on the amount of land they farm. These direct payments will be gradually phased out over a seven-year period starting in 2021. Under ELMS, farmers will be encouraged to enter into a contract with the government to produce environmental land management plans, and be paid for the environmental outcomes they deliver, often working in collaboration with other farmers. The policy represents a major shift away from traditional farming towards a system that pays public money primarily for delivering environmental benefits.'

'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.'

'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.'

'The success of the Programme depends on government assumptions about how the farming community will respond to the new policy. Direct payments from the EU currently account for an average of 61% of farms’ net profit. Without these, 42% of farms would have made a loss between March 2014 and February 2017. The Department expects the withdrawal of direct payments to be offset by improved business approaches, new entrants to the sector taking over farms that have ceased to be viable, and productivity gains across the sector. However, there is limited evidence that many farms are equipped to increase their productivity.'

'Defra is starting to specify its digital requirements for the Programme before key decisions have been made about how the new policy will work in practice, increasing the risk that it will need to make significant technology changes late in the Programme. For example, Defra has not yet decided which environmental outcomes will be rewarded or how much farmers will be paid.'

'The NAO recommends that Defra gets a plan in place with realistic timescales, that has sufficient flexibility to allow changes to be made as more is learned about how farmers react to the new farming policy. It should extend participation in its pilots to a wider range of farmers and land managers to test their willingness and ability to participate in ELMS, and determine the level of ELMS take-up it needs to justify investment in its design and development.'

The report can be found here: New farming programme

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Friday, May 31, 2019

Defra pledges to cushion basic payment withdrawal

Defra has pledged to cushion the impact of the withdrawal of the basic payment against a background of concern about the mental health and well-being of farmers: Defra pledge

Defra’s own statistics show that 16% of farm businesses are already unprofitable – even while direct payments continue to be made. That would rise to 42% without direct payments, which the government intends to phase out over seven years from 2021.

Much emphasis seems to be placed on resilience, and farmers are resilient, perhaps sometimes too much so for their own good. However, resilience can turn into a resistance to adaptation to changing circumstances.

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