Seasonal greetings to our readers

This picture of a somewhat post modernist Christmas tree that I took in Vilnius, Lithuania recently is suitably bleak for a CAP blog

It's been a pretty mixed year for those of us who would like to see a reformed Common Rural Policy delivering real economic benefits to deprived areas in the countryside and promoting environmental goals. The Pillar 2 budget is much smaller than we would have hoped for.

The Doha Round is suspended and it is uncertain whether an agreement can be reached. The EU may then pull back from its commitment to phase out export subsidies which would deliver real benefits to farmers in the Global South. It would also remove what has been the most powerful pressure for CAP reform. In the States, it looks as if we are going to get another Farm Bill that will ensure that most of the benefits go to corporate farmers growing particular commodities.

Some hope that the new transparency about who gets what from the CAP will exert pressure for reform as the public becomes aware that most of the money goes to large-scale commercial farmers. However, Britain and Germany are likely to resist any cap on subsidies. Public pressure on these matters tend to not to be maintained and is confused by the complexity of the CAP and misleading public messages.

In this respect it was alarming to see the BBC's respected environmental correspondent, Sarah Mukherjee, for whom I have a great deal of time, making a broadcast on Radio 5 recently which contained a number of basic errors about the dairy sector and appeared to be an unquestioning acceptance of a NFU press release. The dairy sector in the UK does have real problems, but the broadcast gave a soft treatment to the retailers and their market power.

Our friends at the farmsubsidy.org network are organising a conference on transparency in the CAP in Budapest at the end of January which unfortunately conflicts with other commitments that I have. However, it looks very interesting and further information can be found here:
Budapest

Sustainable farming and food

The highly regarded Food Ethics Council has published an interesting and well informed paper on 'Sustainable Farming and Food'. You can download it at: Sustainable . There is also an oppprtunity to participate in an online discussion on the paper.

I'm not sure that I agree with all the paper, as I think that at one point it does fall into a protectionist trap set by the industry. When time allows I will publish a summary and some comments here. In the meantime, readers of this blog may wish to take a look at the publication themselves.

Parliament throws out modulation plan

The European Parliament has thrown out a plan agreed at the 2005 summit of EU heads of government to allow the transfer of funds from Pillar 1 expenditure on farm subidies to Pillar 2 rural development to be increased up to a maximum of 20 per cent. Only the UK was planning to use the full amount, given that it receives low levels of rural development funding and wants to find money for its ambitious agri-environmental schemes. The Parliament can only delay the eventual decision, as it is not part of the co-decision procedure.

The motion was carried by 599 votes to 64. The Parliament believes that such a high rate of voluntary modulation would jeopardise subsidies to farmers and would also repersent a further step towards renationalisation of the CAP with farmers in different member states receiving differing amounts of cash. The Commission itself would prefer a higher rate of compulsory modulation to a range of voluntary rates.

Because of the summit deal the EU will receive on average 30 per cent less funding for rural development between 2007-13 compared with the current funding period. The Commission asked for €88.75m but this was cut by more than 20 per cent to €69.76m. This will be partly offeset by compulsory modulation, but this was intended to provide additional funds for rural development, not offset cuts made in a budget deal.

Spending more money on rural development compared with traditional farm subsidies is seen as a way of building a more diversified, dynamic and yet environmentally friendly rural economy in Europe.

UK to become net milk importer?

Two separate respected sources, Sir Stuart Hampson and Kite Consulting, have claimed that the UK could become a net milk importer within a few years. Such a story is manna to the supporters of farm subsidies on food security grounds. It also has a good populist feel, allowing papers to run stories about British tea being drunk with French milk if they so wish. But what is the substance behind these claims?

Sir Stuart Hampson, having just finished his year long stint as chair of the respected Royal Agricultural Society of England, argued that the UK could become a net importer of milk within five years if small dairy farmers continued to be forced out of business.

Sir Stuart made his remarks as Defra released figures showing that England lost on average one dairy farm a day in 2005. He argued that supermarkets had a responsibility to pay a 'fair' price for milk, pointing out that up market Waitrose (part of the John Lewis Partnership of which Sir Stuart is chairman) paid a 3p premium to all farmers.

He commented, 'The price paid to the farner is too low, it is not meeting the cost of he farming. I am trying to draw attention that this is a market that has a fair price. [I am not quite sure what such a price is other than a market clearing price]. The decline in incomes of dairy farmers does give me cause for concern.'

Kite Consulting's Milk Forecasts report warned that the UK is heading for its largest ever under quota position. The report's co-author John Allen said, 'The exodus from the dairy industry is running at 7% and accelerating. In the next three years one in five dairy farmers will quit.' With annual demand at 12.6bn litres if the decline continues supply will be as low as 12.68bn by 2011. That meant that by November of that year, when supply is seasonally at its lowest, the UK could see a real milk shortage.

The government and the processing industry hit back

The government was quick to point out that of the 13bn litres produced annually, only 7bn litres went into fresh milk. Robert Wiseman Dairies said the problem for the milk industry was not that it was producing too little milk, but that it was producing too much. 'Unfortunately the volume of milk produced by the dairy farming sector in the UK is such that three in every 10 litres is having to be sold in commodity markets.'

Arla chief executive Tim Smith said that importing liquid milk was unlikely. 'Anyone contemplating importing milk is committing financial suicide. The eye-watering costs of transporting milk from abroad make it unviable. The market price will be adjusted as we near the balance of supply and demand. But it is all down to market forces. We are still in a position of over supply.'

An overview

We should remember that this sector still receives substantial CAP subsidies, even if they are reducing. There is also a distinction between the number of farms going out of production and the volume of production. If smaller (and often unavoidably less efficient) farms mainly go out of production, the effect on volume will be muted, indeed other producers may expand if the price is sufficiently attractive. Of course, a decline in the industry in, say, western England could have landscape and social effects, but that is another matter.

The price UK dairy farmers receive is the lowest in Europe and this in part no doubt reflects the market power of retailers, but that same market power has led to falling food prices and hence a positive effect on the overall level of inflation. Dairy farmers sometimes claim that they are making a loss, but this may be after labour costs (mostly those of the family) have been paid out of the business.

There is no doubt that dairy farming is a particularly demanding type of farming and the rewards are not that great for smaller enterprises. But whatever is done we should not increase the level of subsidy. Production would have to fall a long way before fresh milk supplies are threatened.

New world wines continue their challenge

Santiago, Chile. Yestredya I visited a vineyard here in Chile´s central valley not far from Santiago. This vineyard was founded in 1880 and is currently producing 19 million litres a year. I have seen similar operations in Australia, although not on this scale.

A German in the party asked about the concept of terroir which is very much emphasised by European wine producers giving a wine its distinctiveness. However, this was clearly of no importance in Chile. As in Australia (now suffering from a glut of wine), Chilean vineyards produced drinkable and affordable wines for the world market. They then keep the best wines for themselves, as in Australia. At a reception at the presidential palace in Santiago, I had one of the best reds I have ever drunk.

There is no appellation system in Chile, only reserve wines finished in oak barrels and other wines. The New World wine countries have eight years to come up with a system, but this is proving difficult.

Our guide was less emphatic than those in Australia about the merits of screw top bottles or synthetic corks but pointed out that the rising price of natural cork meant that it could cost as much as the wine.

As the discussions about the reform of the European wine regime meander on, there is no sign here in Chile that the marketing challenge they present to European producers is going to diminish.

US election results not good for trade

Whatever other benefits they bring, the US election results are not good news for agricultural trade. Protectionist sentiment in the Congress has undoubtedly been strengthened and Trade Promotion Authority is likely to be renewed. This makes a Doha Round settlement less likely, removing a key pressure for CAP reform.

The next chair of the agriculture committee in the House is likely to be Minnesota congressman Collin Peterson. His constituency has a strong representation of corn and sugar beet farmers, two crops that have the most to lose under changes to the farm bill backed by agriculture secretary Mike Johanns. He is likely to oppose efforts to change American's generous farm subsidies, thereby weakening incentives for the EU to give ground.

Too many errors in CAP payments

In its annual report on the EU's farm accounts in 2005, the Court of Auditors 'found that CAP expenditure [€48.466 billion last year] was still affected by a material level of error which is not detected or prevented bt the supervisory and control systems.' It noted 'weak internal controls for the majority of EU expenditure, both within member states, and at the Commission, and a high incidence of errors in the underlying transactions.'

Greece was singled out as the worst offender. The Court declared that the quality of inspections in Greece was low and that the reporting of results was unreliable. Farmers' unions are responsible in Greece for inputting all data into the computer system, and can make changes whenever they want - without the changes being recorded. Not surprisingly, instances of farmers exaggerating the size of their land are not uncommon.

All of the olive oil subsidies examined in southern countries were found to contain either an overpayment and/or one of more formal errors. This led the Court to ask whether the Geographical Information System, the system of aerial photographs used to verify the existence of olive tree parcels was doing its job.

The Commission got quite humpy about the Court's findings complaining about its 'focus on finding individual errors in small smaples of transactions.' The Commission noted with apparent pride that it had clawed back €2.17 billion in ineligible payments in 2005. So that's all right then.

Gloomy prognosis on Doha Round

Recent conventional wisdom has been that the Doha Round talks will get under way once the US elections are out of the way with a window of opportunity between then and the spring. After then it would be too late to get an agreement through Congress using trade promotion authority (once known as fast track) although a few months' extension might be possible.

However, the chair of the agriculture negotiations, Crawford Falconer, has now said that he thinks the Doha Round will fail. He still thinks that both the US and the EU have room within their negotiating mandates to improve their offers on reducing farm support, but he suggested that the political will was missing on both sides. There was still the possibility of finding 'an outcome that would work and one that would make a difference', but time was running out.

Falconer's intervention could be a ploy to encourage a focus on the issues and to offset overly optimistic pronouncements by politicians. Nevertheless, it is easy to fall into the comforting belief that, as happened in the Uruguay Round, it will be 'all right on the night'. This time it may not be and the consequences for agricultural trade and further policy reform would be serious.

Green box does distort trade, claims Indian study

A report commissioned by the Indian Department of Commerce and carried out by UNCTAD's Indian team challenges the EU's argument that decoupled aid payments have only a minimal trade distorting effect. According to the researchers' model, EU farm exports would fall by a massive 45 per cent if Green Box subsidies were removed and production would fall by close to 6 per cent.

The EU, US and Canada would all see exports decline by upwards of 40 per cent in the absence of Green Box payments, while Swiss and Japanese exports would fall by over 60 per cent. However, most developing countries would see exports increase by around 20 per cent.

The Green Box issue remains open within the suspended Doha Round negotiations. However, given the EU's attachment to its decoupled Single Farm Payment system, the bulk of which falls into the Green Box, it is unlikely that any Doha Round settlement will lead to changes in the Green Box. However, there could be provision for further discussion of what can legitimately be placed in the box, putting a time bomb under the whole CAP.

Subsidy data to be made public

EU citizens in all member states should soon be able to find out who gets what in terms of farm subsidies, following a decision by Coreper. This may help to create further public pressure for CAP reform.

Ambassadors agreed 'in principle' to open national farm accounts to public scrutiny. However, the decision requires agreement from the European Parliament which hopefully can be obtained by the end of November. It remains unclear whether the Commission or member states will be responsible for publishing the subsidy data, the Commission being reluctant to take responsibility for publishing information it cannot verify.

France is continuing to demand that no subsidy disclosures are made before 2009 when the presidential elections will be safely out of the way. Jack Thuston from the transparency campaign farmsubsidy.org commented, 'It's great news that European governments are endorsing transparency. But it is quite wrong that we should be kept in the dark until 2009, as the French government is reported to be insisting upon. It now falls to elected Members of the European Parliament to stand up for the rights of those they represent. European citizens have a right to know who gets what from the EU and why. Secrecy is bad for European civil society and bad for the reputation of European institutions.'

Even if the public do become indignant at the size of the handouts given to already prosperous farmers, fundamental reform is likely to encounter continying resistance from the Commission. Commissioner Mariann Fischer Boel has dismissed Defra's reform document as 'incoherent' with 'a complete lack of analysis behind this paper' in an appearance before the House of Commons Environment, Food and Rural Affairs select committee. When I appeared before the committee, I argued that the paper was a strong one, but the problem was the lack of a political strategy to put it into effect.

Fischer Boel insisted, however, that many farmers would be unable to survive without the direct payments scheme and would start to abandon their land with adverse environmental consequences.

Visit farmsubsidy.org at Subsidies

Estonians to pay €35 a head sugar stockpile fine

Estonia will have to pay in full the €46 million fine imposed by the EU for stockpiling sugar in the months before accession in 2004, farm commissioner Mariann Fischer Boel has insisted. The fine amounts to the equivalent of about €35 per person.

Estonia has contested the fine at the European Court of Justice, arguing that a large part of the sugar surplus of 91,464 tonnes have been hoarded by private households in preparation for a national frenzy of jam making. Making jam and syrup at home is a common practice in the Baltic state.

Sweden tops new CAP transparency index

On the day when the European Court of Auditors has for the twelfth year running refused sign off the European Union’s annual budget because of concerns about fraud and poor controls, farmsubsidy.org is launching a new Common Agricultural Policy transparency index. The index is based on a comprehensive scorecard that rates all member states according to whether they have released data on who gets what from the EU’s Common Agricultural Policy (CAP). Sweden tops the index with a score of 95%, followed by Denmark (91%) and Slovenia (87%). So far twelve EU member states have released data to farmsubsidy.org.

Criticising poor controls in the EU budget, the Court of Auditors said that 'Beneficiaries — farmers, local authorities, project managers — claim more than they have the right to claim'. Most of the problems occur with payments made by member states not by Brussels, because 76% of EU payments are delegated to member states.

Jack Thurston, co-founder of farmsubsidy.org said:

'Transparency is a guard against fraud and maladministration and a way of reconnecting citizens with their governments. Transparency leads to more legimate and effective policy-making. We hope this scorecard will be used to praise the few EU member states who have embraced transparency and shame the many who continue to hide farm subsidies behind a veil of secrecy. All European citizens pay for farm subsidies, they should have a right to know who gets what - and why.'

Read the CAP Transparency Index report:
Transparency

Are CAP's natural predators awakening?

Farm subsidies campaigner Jack Thurston who runs the excellent website on farm subsidies has responded to the story below on the 'health check' on the CAP: 'As well as payment limits, the health check may also include a minimum farm size to qualify for any payments, i.e. a 'franchise'. The single farm payment has seen a big increase in the number of claimants, often it costs more for the government to administer the payments than the payments are worth. A lower limit on payments was specifically mentioned by Fischer Boel at a public meeting on 17 July 2006 in Brussels. See:

Report

Jack Thurston continues, 'It is currently not clear how the CAP health check will fit in with the review of the EU budget that is scheduled for 2009. What is certain is that we are in an era of fiscal restraint in the EU, so any new money for new projects will have to be found from within existing budgets, highlighting in sharp relief the "opportunity cost" of the CAP. The natural predators for the CAP may finally be awakening.'

Since Jack wrote these notes, Commission Fischer Boel clarified that she will not accept budget cuts to the CAP as part of the general EU budget review in 2009, but admitted that the same guarantees could not be made after 2013.

She also said that 'These are busy days in the kitchen - lots of pots are boiling at the same time. Rather than keeping the door to the kitchen sealed I have decidd at an early stage to give an impression of what is boiling under our lids.' A look at cross compliance was first of the menu, followed by the consequences of partial decoupling and the choice of model for implementing the SPS.

Hardly an inviting or daring menu and some of us would like to see the kitchen closed in its soup kitchen role for farmers.

Health check for CAP

Farm commissioner Mariann Fischer Boel has said that what the CAP will face in 2008 is a health check, consciously avoiding the term 'mid-term review' used by her predecessor Franz Fischler. Her comments follow the recent informal meeting of farm ministers in Oulu, Finland.

One likely subject to arise will be decoupling with the ten pen cent of direct aid payments not paid in decoupled form likely to be targeted. Whether the sigle farm payment should be paid on an historical or flat-rate regional basis will also be examined. At present no EU-15 members are operating the same system and some have variations within their national borders.

The compulsory modulation rate may well rise above 5 per cent. The Commissioner is also keen on capping the amount that any individual farm would receive at €300,000. Such a move would be contentious with Britain and Germany who would claim it penalised efficiency and it is not clear that there is a legally watertight definition of a farm business. However, siphoning off money from large scale farmers and transferring them to the second pillar would create a pot of over €1 billion a year.

The future of intervention payments will also be up for examination with the possibility of it eventually being based by a private storage programme. The Commission is also talking about the abolition of dairy quotas by 2015.

Thus by the middle of the next decade be could have a CAP with very different objectives and policy instruments. It should be less market distorting, and hence WTO compatible, but it would probably leave as much money being spent on agricultural and rural policy. Reformers would thus only get partial satisfaction. They have objected to the objectives and instruments of the old style CAP but also to the opportunity cost represented by the €48 billion a year spent on it.

Co-op gets farm subsidies divi

The leading recipient of CAP direct aid in the UK in 2004 was Farmcare Ltd., the large scale farming group owned by the Co-op. It got a divi of £2.359m from CAP, down from about £2.6m in 2003. All of the top five English aid recipients were farm businesses or co-operatives, Strutt & Parker (farms) coming in second with £1.382m.

However, private landowners also feature in the list. Sir Richard Sutton's Settled Estates got £917,650.93p. Lord Rayleigh's farms got £571,808.88p. Grovesnor Farms, owned by the Duke of Westminster, reputedly one of the richest men in the UK, came 45th in the list taking £421,000.

Sugar and dairy sector companies dominated the list of non-CAP payments, accounting for all of the companies in the top ten. Sugar importers and refiners Tate and Lyle claimed a cool £125m with traders C. Cazrinkow Sugar coming in second with some £39.4m. Fairfield Foods Ireland got £18.3m while Nestlé had to be content with £5.16m. The agricultural division of multinational Cargill got a mere £1.478m.

The data revealed by Defra shows that farmers were paid a total of £1.4 billion in 2004/5. Non-farm payments totalled £431m, making the overall total over £1.84 billion.

More information on subsidies across the EU (at least for those countries that have released data) can be found at Jack Thurston's web page: Subsidies

Decoupling at risk after ECJ overturns cotton reform

A ruling from the European Court of Justice that the reformed EU cotton regime introduced in 2004 must be dismantled and replaced raises wider questions about decoupling, a centrepiece of the latest round of CAP reforms.

In the cotton regime reform the Commission decoupled 65 per cent of payments but left 35 per cent coupled which they claimed would be enough to maintain cotton production in all areas of the EU where it was important for the agricultural economy (principally Spain and Greece).

Spain, however, claimed that the reform did not provide enough subsidies to ensure that cotton production remained viable. They had a special legal argument because the maintenance of cotton production is enshrined in Spain's EU accession treaty.

The Court has required the Commission to make a fresh impact assessment. The current regime can continue until a new one is place, an outcome welcomed by the Commission which also emphasised that the basic principle of decoupling had not been challenged. Nevertheless, the ruling could re-open the issue in relation to other products where partial decoupling has been retained to protect production in [politically] sensitive areas.

It could also lead to trouble in the WTO where the 'cotton club' of Burkina Faso, Chand and Mali are upset about the collapse of the Doha Round and the prospect of better access to markets. They are considering a legal challenge over subsidies to cotton producers in rich countries. Although their principal target has been te US, any talk of recoupling payments could bring the EU into the frame.

Another tricky problem for the Commission to try and unravel.

Little change in Poland's farm structure

As Poland takes steps to reassure other member states that it is a good European, news comes from Eurostat that the modernisation of farm structures is proceeding at a snail's pace. Average farm size fell very slightly between 2002 and 2005. The average farm size in Poland was now 12.1 hectares compared with 12.2 hectares in 2002.

Some 2.67 million people are still employed in Polish agriculture, although more than half of these were family members working on a part-time basis. To qualify as a farm, an enterprise has to have an annual gross margin of €1200. By this definition there are some 1,082,700 farms in Poland. 35 per cent of farms have less than 5 hectares of farmland at their disposal, while only two per cent held more than 50 hectares. However, holdings in the latter category accounted for some 26 per cent of all Polish farmland.

Around one-fifth of farmers did not own a tractor. However, despite their small size, only 5.9 per cent of holdings engaged in any other gainful activity on farm. One would think that there was more scope for rural tourism. Meanwhile, the sums received from the EU, small though they are, are vital to the survival of such holdings. Historically, some of them were worked on a part-time basis as smallholdings by industrial workers who have now often lost their jobs in heavy industries.

Obesity subsidies for farmers?

Farmers' spokespersons have been trying hard to talk up the threat to food security from terrorists as a means of justifying the continuation of agricultural subsidies. However, the problem of obesity may give them a new basis for subsidy claims.

Australia has one of the worst obesity problems in the world and a call has been made for fruit and vegetables to receive subsidies to make prices more affordable. Research has shown that if apple prices were halved, sales would treble.

How the subsidy will be paid is yet to be decided. It does give farmers an opportunity to make use of discourses about health, although clearly some producers would benefit more than others.

Cows moo with a local accent

Cows in the south-west of England are mooing with an 'oo-arr' according to farmers in the West Country Farmhouse Cheesemakers Group. They believe that their own regional accent has influenced their cows' pitch and tone who have picked up the distinctive Somerset twang. Accent shifts have also been noticed in cows in Norfolk, Lancashire, the Midland and Essex, the latter presumably having an 'Estuary' moo.

John Wells, Professor of Phonetics at University College London, provided academic confirmation: 'This phenomenon is well attested in birds. You find distinct chirping accents in the same species around the country. This could also be true of cows.'

The farmers themselves believe that the quality time they spend with their cows has led to this distinctive accent. In the winter the West Country cows are wrapped up in cow coats and are played classical music to help them relax during milking.

Lloyd Green of Glastonbury explained, 'I spend a lot of time with my Freisians and they definitely moo with a Somerset drawl. I think it works the same as with dogs - the closer a farmer's bond is with the animals, the easier it is for them to pick up on the accent.'

The link between intensive farming and human health

Zoonotic diseases that transmit from animals to humans are nothing new. Viruses have been jumping the species barrier through history, but modern industrial farming practices could increase the risk.

Given the widespread use of industrial farming in the EU, the potential for the emergence of new zoonotic diseases would appear to be high. Intensified animal production is creating a narrowing genetic base, particularly in dairy animals, poultry and pigs.

The economic imperative to make more use of high-yielding breds favours the spread of recessive genes responsible for traits such as poor immunity. According to Tony Hart, co-director of the National Centre for Zoonosis Research at the University of Liverpool, 'Livestock are highly inbred to produce maximum yield in the shortest time. This creates animals which are prone to become carriers of disease.'

Conditions on farms can promote the development of highly resistant strains of bateria, turning crowded pens into areas where there is a high risk of disease and increasing the risk of transmission to humans. There have been some positive developments such as the outright ban in January of the routine use of antibiotics in feed for growth promotion purposes.

Nevertheless, Dil Peeling, senior officer at the Eurogroup for Animal Welfare says, 'We expect to see an increase in the use of antibiotics on farms. The routine use of antibiotics may be banned. But, in the same system, animals are kept in stressful conditions that reduce immunity. In some cases, genetically they have less immunity, so we are forced to rely more on biosecurity [antibiotics] when minor diseases come up.'

According to Peeling, CAP with its historical emphasis on quantity rather than quality continues to drive harmful industrial practices. It could be argued that the reformed CAP is trying to place a great emphasis on quality, including animal welfare. Fischler was the first farm commissioner to introduce this theme into the debate, but Peeling believes that the CAP has gone backwards since then.

Certainly there is a risk of accession states learning bad lessons. 'New accession states believe that the future of agriculture must be the same as that which they have seen in Western Europe. They are not learning from old mistakes, so we're seeing funds going towards intensification,' says Peeling.

The BSE scare shook up European agriculture and contributed substantially to the public resistance to GM crops. Another crisis could reinforce demands for higher standards of animal welfare, although farmers would argue that in the interests of a level playing field there should be some tightening of standards in relation to goods imported into the EU.

Large farms benefit from direct aid

880 large farms or agri-businesses each received over €500,000 in the final year of the old pre-Single Farm Payment CAP regime according to draft Commission figures. This means that just 0.02 per cent of beneficiaries received 2.5 per cent of the total EU budget for direct aids (€700m out of €28.2 billion).

Germany once again had the largest number of farms receiving payments of over €0.5 million each, 620 farmers who received €0.5 billion between them. This is a reflection of the survival of large farms in the former East Germany.

However, France has its large farms as well. France was the largest overall recipient of direct aid in 2004, €6.9 billion, and of this €1.7 million was shared out between fewer than ten of the biggest farms.

Well over half the farms received CAP aid in 2004, just over 2.5 million, received annual aid cheques of less than €1250. Of these farms, 2.1 million were situated in either Italy, Greece or Spain. There has been speculation that these very small payments could be phased out because of the transaction costs involved in calculating and paying them. However, even very small sums can be important to marginal enterprises, e.g., where the farmer is past retirement age.

'Yo liars' claim as Doha blame game gets under way

Rookie US Trade Representative Susan Schawb has effectively accused the EU of lying as the blame game for the collapse of the Doha Round gets under way. The US has been taking a lot of the heat and no doubt the search for someone to blame makes the participants in the failed talks feel better but it does little for the future growth of the world economy or fairer trade.

Ms Schwab said that the US had so far 'refrained from responding to the finger-pointing by some' but she said the EU's claim that the US had doomed the talks by failing to show flexibility in negotiations was 'false and misleading' and made with the intention of 'attempting to divert blame for the stalemate.'

Attention is now focusing on the US farm bill due to expire next year which has provided considerable aid to large-scale farmers. Three-quarters of the subsidies have gone to growers of rice, corn, wheat, soyabeans and cotton. One idea that is being floated around Congress is to extend for one year both the current spending arrangements under the farm bill and fast-track authority.

The EU is certainly not blameless in all this as its stance was weakened by the rebellion of agrarian states led by France, leading to a relatively weak, if cleverly presented, tariff cutting offer. Emerging countries like India have also been running scared of the electoral damage that can be done by their poorer farmers.

As Susan Sechler, US director for trade and development at the German Marshall Fund of the United States (a think tank) commented, 'It used to be that first you got a deal at the WTO and then used it to discipline domestic agricultural spending. That doesn't work any more, partly because developing countries in the WTO won't accept a post-dated cheque.'

At the heart of all this is the changing economic structure of power in the world. Relations between the EU and the US have become increasingly tense over a range of issues, not just economic ones. But even if they wanted to function as a duopoly resolving their own disputes at the expense of others, they couldn't do so because too much influence has passed to the emerging countries. That is why the G7/8 is largely an irrelevance and we need a G4 of the US, EU, China and Japan, with some involvement from medium-sized powers like Brazil.

Doha Round suspended

Given that the G8 summit failed to make any substantive progress on the Doha Round, it is no surprise that its attempts to kick start the Round have failed. Negotiators were going to given up their holidays to meet a new August target date, but Pascal Lamy has just announced that the round has been suspended. He commented that some countries clearly preferred a 'Doha Light'. Certainly there are many in the United States who think that the country's interests can best be served by bilateral deals.

The suspension followed a failure to make progress in Group of Six meetings on Sunday. Four of the six G6 participants blamed the US for the collapse of the talks. EU trade commissioner Peter Mandelson commented, 'If the US continues to demand dollar-for-dollar compensation for reducing domestic support, no one in the developing world will ever buy that, and the EU will not either.'

For its part the US has become increasingly frustrated by what it sees as the gutting of its proposals to cut farm tariffs which generated opposition from the EU, Japan and Switzerland. Susan Schwab, US trade representative, complained that some participants were more interested in loopholes than in market access.

The Uruguay Round was, of course, suspended in 1990 after the supposedly final talks in Brussels collapsed and was eventually revived. However, the political climate is not favourable. Mid-term elections are looming in the United States which seem to have affected President Bush's thinking. If the Democrats take either the House or the Senate, a renewal of authority to negotiate trade deals is even less likely.

The collapse of the talks is good news for heavily subsidised large-scale farmers in the US and the EU. Trade negotiations have been the most successful driver of CAP reform. Politicians in poor countries will get political points for protecting poor farmers against competitive imports. But it's bad news for agricultural exporting countries such as Australia and Brazil. And despite the celebratory noises emanating from some NGOs who argue that no deal is better than a bad deal this is not good news for farmers in least developed countries, for example cotton producers in West Africa who have been hit hard by US subsidies.

What of the WTO itself? The suspension of the Round does not mean the end of the Disputes Settlement Mechanism. Former EU commissioner and WTO head Sir Peter Sutherland commented, 'The WTO is so crucial, it will survive, but it will be damaged. The collapse of the talks leave global multilateralism in a parlous state.'

The WTO is regarded by many of its members as the last multilateral organisation by whose decisions the US agrees to be bound. In truth this is another victory for US unilateralism and any bilateral deals that are forged in the future will benefit the US more than the other participant. As Michael Cox of LSE warned in the March issue of European Political Science, the bridge across the Atlantic can no longer bear any heavy traffic and there is a widening gulf on issues and values between the EU and the United States. As an Atlanticist, this is something I regret, but it is difficult to see what remedies there are to hand.

Rising grain prices may push up cost of bread

Record summer temperatures, low global grain stocks and the expected growth in biofuels, have seen wheat prices rise to ten year highs and may lead to big increases in the cost of bread and pasta. Corn [maize] and barley prices are also likely to raise which may affect the cost of beer and breakfast cereals. For the fifth year in six global production is expected to fall short of demand. Hedge funds have been active in wheat futures, with a sharp increase in the number of contracts bought in the US, UK and elsewhere in Europe.

Both the US and Northern Europe have experienced record temperatures, which some see as evidence of the reality of global warming. Some wheat farmers in the UK are harvesting a month early for the first time since the 1979 heatwave. In Northern Italy, the hot, dry weather is estimated to have caused €100 of damage to crops with yields forecast to fall by 9 per cent.

Ethanol plants using wheat as an ingredient will open in Europe in the next two years. Christopher Brodie, a partner at hedge fund Krom River, commented, 'Once the ethanol plants open, we will link the price of petrol to the price of bread, because the price of wheat will be settled by who pays more, the oil industry or the food industry.'

Shroud wavers among the farming community will no doubt see these developments as supportive of their food security arguments for continuing subsidies. Alternatively, one could see it as market forces of supply and demand generating a better rate of compensation for farmers, ultimately leading, if the trends are sustained, to a rise in supply.

In the land of fresh rice ears of many autumns

I recently returned from my first visit to Japan, a country about which I have read extensively over the years. It was therefore no surprise to see paddy fields located in the middle of the urban sprawl of the Osaka area, one of them being tended by a presumably part-time farmer. Japan, I was told, has something like 2.2 times the population of the UK but half the useable land area. In the area where I spent most of my time, Fukuoka prefecture, there was more emphasis on value added niche crops like strawberries.

In the 8th century Nihon shoki [Chronicle of Japan] there is a famous passage that refers to Japan as 'the land of fresh rice ears of fifteen hundred autumns.' This is seen as example of the deep roots of agriculture among the Japanese. A former PhD student, now teaching in Japan, had negotiated with a farmer to obtain a supply of brown rice in return for helping with the planting.

Rice production in Japan and the Republic of Korea remains highly protected. Although the high tariff barriers will have to be reduced, I have some sympathy with demands to maintain them on cultural grounds. Japan is a unique blend of tradition and modernity and certainly the most distinctive place I have ever visited (and that includes remote ethnic minority areas of China).

There is an inconsistency in calling for the maintenance of some protection in Japan and pressing for its elimination in France. In both cases the attachment to a particular form of agriculture might seem to be sentimental, even though both countries have distinctive and much admired food cultures. I would maintain that the French way of life is less tied up with a particular pattern of agriculture than is often believed, particularly given that many French farms are large scale. But perhaps I feel an affinity with another island kingdom that I do not feel with France, a country I have never visited.

UK farmers slow to respond to reform

A survey of farmers carried out by HSBC Bank shows that most farmers are aware of the need to adapt their businesses as production support declines, but few have a clear vision of how to achieve this.

The survey found that 64 per cent of farmers have done the calculations to find the level of their likely Single Farm Payment over the next three to five years. However, 87 per cent of the sample intended to either maintain their set aside at the same rate as last year or ro reduce it, indicating that the cropped area for the 2007 harvest is likely to remain at a similar level to that of recent years. Surprisingly, only 52 per cent of the farmers questioned know the cost of producing a tonne of wheat on their units which is the key of basic information that one would think that any business needed to make commercial decisions.

Few farmers are planning ahaead to replace the state support or reduce their costs in line with its withdrawal. Stuart Ellwood, head of agriculture at HSBC, is surprised that the rate of change is not faster and is urging producers to move away from the traditional cropping patterns dictated by CAP payments to growing for other food and feed markets, and alternative land uses such as biofuels, pharmaceuticals and textiles.

Blame game on Doha Round

Unless there is some sudden and unanticipated breakthrough, the Doha Round trade talks look increasingly likely to fail over agricultural trade. It has to be remembered that under US trade law the schedules must be handed to the US Congress at least 180 days before Trade Promotion Authority expires on 1 June. It is unlikely to be renewed and it would be impossible to get any deal through the inward looking Congress without it.

So the blame game is now on with many fingers pointing at Uncle Sam. One view is that the US remained particularly intransigent, refusing to give ground on domestic farm support until it was assured significant market access to emerging economies. The US was pressing for a 90% cut in tariff rates compared with the 75% sought by the G-20. Moreover, Oxfam argued that the US's offer on farm support would actually allow it to increase farm payments compared to present levels.

US negotiators argued that developing nations would only reap real benefits from trade if there was significant market liberalisation. This neo-liberal vision did not appeal to the developing countries who argued that substantial opening of markets should be not be forced on their fragile economies.

The US is perhaps on stronger ground when it criticises the stance of emerging countries, arguing that richer developing countries such as Brazil, India and China should stop hiding behind poor nations in the trade talks and start to open up their own markets. This overlooks the fact that Brazil, where the agriculture minister has recently resigned, has a big problem with the army of landless labourers belonging to the radical MST movement. The large peasant populations in India and China (where there have been a number of disturbances surrounding the seizure of farm land for development) could easily be radicalised or could flood into the cities looking for work.

US ag policy is in a mess

The fact remains that US ag poicy is in a mess. As the authoritative Agra Europe has commented, 'What stands out a mile on the farm support issue is that successive US Administrations have got themselves into an unholy mess on agricultural support from which the current Administration will have to extricate itself both to be able to move on Doha and, eventually, to conciliate its own taxpayers.'

At the root of the problem is electoral politics in the US. As Graham Wilson has shown, the farm vote can still be decisive in tight contests for the Senate in interior states. But, above all, the cost of getting re-elected, not least in the House, means that even urban Congress members are willing to take donations from farm lobbies.

The FAIR act of 1994 appeared to open up a whole new era in US farm policies, including the introduction of totally decoupled income payments to replace production subsidies. However, once commodity prices started to fall in the late 1990s, the farm lobby successfully pressured for more handouts, initially on an 'emergency' basis and later consolidated in the 2002 Farm Bill which was a backward step. In particular, the introduction of counter cyclical payments was particularly damaging from a world market perspective as they maintain US production at high levels even when market prices are falling.

The US also hands out $1.5 billion in government-financed crop insurance. This is treated as non-product specific under the 'de minimis' rule. However, the EU and others argue that almost all US crop insurance is product specific.

The EU does appear to be prepared to give ground on senistive products, lowering them from 8% to about 5% of all tariff lines, although that would still be far too high as far as almost all other participants in the trade talks are concerned.

Doha Round in crisis

'Crisis' is an overworked word in relation to trade talks, but the Doha Round now appears to be in serious trouble after a failure to make any progress on agriculture in Geneva at the end of last week. The talks petered out on Saturday, having reached no conclusion on modalities,the next step towards an actual agreement.

The Group of Six (the US, EU, Japan, Brazil and Australia) have asked WTO director-general Pascal Lamy if he can mediate between them and he will report back in two weeks, but is unlikely to produce his own text which would serve as the equivalent of the Dunkel draft in the Uruguay Round.

The EU was prepared to give some ground on tariffs, moving its position closer to that of the G-20 group of emerging countries. They were privately indicating that they would prepared to cut tariffs by an average 51 per cent compared with their original offer of 39 per cent. This is very close to the 54 per cent cut asked for by G-20 which the EU calculates as actually nearer 52 per cent.

Much of their G-20's fire is now concentrated on what they see as the intransigence of the United States with a new rift appearing between Brazil and the States. For the United States, new trade supremo Susan Schwab said that the problem was the three S's, not the two in her name, but the 'sensitive' and 'special' products which would enjoy lower tariff cuts and the 'special safeguard mechanism' that allows poor countries to block sudden surges in imports.

The fact is that ministers or other representatives, whether they are from India or the United States, get few domestic points for pushing for trade liberalisation which can disadvantage politically influential groups in their societies. India's trade minister Kamal Nath turned up late for a green room discussion on Friday evening. His excuse was the Argentina v. Germany match in the World Cup which had not delayed the Argentine delegation. Nath's problem is that he and his prime minister are under pressure from Sonia Gandhi to protect poor farmers. The agri-business interests, principally based in the US, that pushed for liberalisation in the 1990s are more divided or less effective a decade later.

It might be possible for the G-8 and national political leaders to intervene, but these 'deus ex machina' interventions have had little lasting impact in the past. Moreover, leaders from most G-8 countries at the moment are either coming towards the end of their tenures (France, Japan, the UK and the US) or lead governments that are coalitions or have fragile political majorities (Canada, Italy, Germany), while Russia can hardly sort out the problems even if it was that much interested in them.

Does it matter? For two reasons it does. First, an agreement in the Round would bring some advances for developing countries, although far short of what they could hope for. Second, a failure of the Round would remove the key exogenous pressure that has led the EU in particular to at least start down the road of dismantling the CAP in its present form.

Farm subsidies remain at high level in OECD

The latest figures from the OECD show that the amount its thirty members spent on domestic agriculture in 2005 was almost unchanged from 2004 at $279.8bn (€221bn, £152bn). Subsidies accounted for almost one-third of farm incomes across the rich world.

EU aid to its farmers fell marginally from $136.1bn to $133.8bn while Japanese and Swiss farmers remained among the most protected. The producer subsidy equivalent, which measures the cost to taxpayers of subsidies and consumers of tariff barriers, was 32 per cent in the EU, 56 per cent in Japan and 68 per cent in Switzerland. The $42.7bn US support represented 16 per cent of receipts.

In very simple terms, a concentrated interest deriving benefits from intervention prevails over the diffuse interests of consumers and taxpayers.

In the land of the square bracket

Just how far apart the leading participants in the Doha Round are on farm trade issues is revealed in a draft paper on modalities published by the chair of the agricultural negotiations, Kiwi Crawford Falconer.

Falconer was obliged to admit that his document is 'inelegant' and it contains no less than 760 pairs of square brackets, indicating a lack of agreement, in a document of 74 pages. This beats the current world record of 402 square brackets in the Seattle draft in 1999.

It is difficult to see any progress on the key issues. For example, there is no narrowing of positions on sensitive products with the text stating that 'each member shall have the right to designate up to [1-15] per cent of dutiable tariff lines as "sensitive products"'.

It is difficult to escape the conclusion that the ministerial meeting in Geneva expected for June 28 - July 3 will fail to make the badly needed significant progress. There is, however, an increasing realisation that the whole Doha Round is in jeopardy given the need for a timetable that will allow for American approval under fast track negotiations.

High level political leaders need to intervene effectively to ensure a renewed focus on the broad picture rather than the ad valorem tariff for butter. That is not an easy task, however, given that many (from American politicians to NGOs, not to mention the French) are arguing that no agreement is better than a bad agreement. What is increasingly likely is that this will be the last omnibus trade round as they hinder as much as help progress towards fairer world trade.

Dubya is cone sharing fave

President George W. Bush may have had bad poll figures recently, but they are starting to recover, and now Americans have chosen him as the No.1 VIP they would like to share an ice cream cone with.

In a survey by Ben and Jerry's, Bush received 21 per cent of the vote, followed by Bill Clinton with 20 per cent, Angelina Jolie with 19 per cent, Jennifer Aniston with 19 per cent and Kelly Rippa with nine per cent. The survey was conducted to mark the launch of the first packaged super-premium ice cream cone which is available in Chocolate Chip Cookie Dough and Cherry Garcia flavours.

Now back to the Doha Round.

New bid to drain wine lake

Wine is the next sector to be targeted for reform in the CAP with proposals to be unveiled in the next couple of days. Farm Commissioner Mariann Fischer Boel seems to be hoping that a successful wine reform will reinforce her credibility as someone who can bring about meaningful change. But she is well aware of the challenge ahead. She told the informal meeting of farm ministers at the end of May, 'There are so many cultural feelings on wine, I would consider [the reform] is going to be even more difficult than the sugar discussions.'

Whatever shape the reform takes the EU is still going to spend €1.2 billion a year on wine subsidies, but the aim is to spend less of the money on the wine that no one is going to drink and is distilled into industrial alcohol or bioethanol. As wine drinkers, especially those looking for a reasonably priced but drinkable wine, turn to 'new world' wines such as those from Australia and Chile, European wines need to become more competitive. My own consumption pattern is probably not unusual in the UK - Australian or Chilean wines for everyday drinking, and more expensive German, Alsatian or Italian wines for more special occasions.

The EU has been considering four broad options: keeping the status quo, carrying out a fundamental reform, implementing the 2003 CAP changes in the sector, or endorsing a complete deregulation of the market. Because this is the CAP we are talking about, the two more radical options are not really on the table.

The most likely mix is temporarily encouraging wine producers to 'grub up' their vines in return for funding, although such policies have not always been cost effective in the past, and extending the current restrictions on planting rights until 2013. Many of the existing cash subsidies would be cut back and overall EU production would be reduced. This would not be welcome news for traditional wine producing nations like France, Italy and Spain.

Incidentally, England does not yet produce enough wine to come within the EU regime but could do in the future if the area occupied by vineyards continues to grow, encouraged by the prospect of global warming. Many of the existing vineyards are boutique wineries, often appealing to a tourist market. English wines can be of good quality, but often cost more than a comparable wine from the continent.

For good reasons, Fischer Boel has particularly targeted crisis distillation. She stated, 'Crisis distillation is becoming a depressingly regular feature of our common organisation for wine. While it offers temporary assistance to producers, it does not deal with the core of the problem - that Europe is producing too much wine for which there is no market.'

The problems the EU faces in this area is shown by the news that French wine growers will receive extra money from their own government to supplement the crisis distillation cash awarded to them recently by the Commission. The EU Wine Management Committee agreed to allow France to convert up to 1.5 million hectolitres of table wine and 1.5 million hl of quality wine into bioethanol. Unpopular French prime minister Dominique de Villepin is calling for 'exceptional national measures' to supplement the Commission's subsidy, a move that is probaby illegal.

I have just got hold of an interesting book on The World's Wine Markets: Globalization at Work edited by Kym Anderson and published by Edward Elgar and I will report any interesting points made when I have read it.

Doha Round crisis

Crawford Falconer, chairman of the Doha agricultural trade negotiations, is to present a paper on Wednesday June 21st in an attempt to get a basis for agreement in the troubled Round. Apparently Falconer's proposals will be close to the compromise model put forward by the Brazilian-led G-20 group. On the biggest tariffs, their compromise proposal of 75% cuts is halfway between the EU offer of 60% and the US demand for 90%. G-20 also proposes a maximum tariff of 100% whereas the EU has ad valorem tariff rates substantially over 100% in several sectors.

However, it will be far from a conclusive document with options and lots of brackets. Nevertheless, his efforts and those of Canada, which has cast itself in the role of mediator, may not be enough. The ministerial meeting at the end of the month may not produce the hoped for outline settlement. The parties are digging their heels in and taking quite entrenched positions.

EU Farm Commissioner Mariann Fischer Boel has refused to confirm or deny rumours that the paper will be based on new figures given to Falconer by the Commission that go further than the EU's October proposal. Falconer's paper is, however, likely to be closer to the G-20 proposal than Brussels would want.

Opposition to what they would see as a sell out is buiilding among member states with the usual suspects involved. France, Italy, Greece, Poland, Ireland and Hungary are the countries most worried that the Commission is ready to sacrifice European agriculture for limited gains in areas such as services and industry. The UK and its liberal allies (Sweden, Denmark, Lithuania and Estonia) is backing the Commission's aim to get a deal in Geneva before the summer break.

Fischer Boel faces a real dilemma. She thinks that the EU still has 'some slight room for manoeuvre' within the negotiating mandate given it by the Council of Ministers, but an EU spokesperson admitted that the room for manoeuvre was 'not very large'.

It should also be remembered that there is a group of countries in which Japan and Switzerland are prominent that take an even harder line on market access issues. The Swiss have argued that if the idea of a tariff cap was dropped, there could be more flexibility in other areas of the negotiations. Canada has suggested that a cap could exist, but countries facing the biggest difficulty in complying could be given some leeway. This is a well intentioned idea but it is very vague in its present form and could drive a coach and horses through parts of any agreement.

Georgaphical indications

This remains a key issue for the EU because of its relationship to the strategy of developing high value added niche products in Europe. The EU and Switzerland, backed by accession states Bulgaria, Romania and Turkey, together with Kenya (with its horticulture sector), Morocco and Thailand, argue that the higher level of protection awarded to wines and spirits should, in the future, be extended to all agricultural products.

The EU has already won the battle to stop marketers using terms such as 'champagne' or 'port' for products which are not made in the specific region to which they relate, although success there was partly the consequence of direct agreement between wine producers in the EU and US. However, products such as 'Parma ham' can still use the name provided that their packaging states they are produced outside of the EU.

Little progress is being made on the issue with opposition to the EU's stance coming from countries as diverse as the US, Brazil and Taiwan.

Toffs would be hit by farm subsidy cap

Some of Britain's wealthiest aristocrats would be hit by a plan to revive caps on farm subsidies, a proposal fought off by Britain and Germany in 2002. However, farm commissioner Mariann Fischer Boel is proposing to revive the plan next year.

Farmsubsidy.org, a group that monitors CAP payments, calculated that the Commission's original proposal for a €300,000 (£207,000) cap would have hit 1,880 farms in the old EU 15. 1,430 were actually in Germany, many of them former collective farms in East Germany. There were 330 farms in Britain and just 30 in France. British landowners that would be hit include the Duke of Westminster and Duke of Marlborough.

The British government hit back at the proposal, claiming that blue blooded gentry were exponents of modern, large-scale efficient agriculture. A Defra spokesman said that the main objective of CAP reform was to make the EU more competitive in world agricultural markets. 'To achieve that it needs to reward farmers who are the most efficient', he said. 'There is no point in CAP subsidies propping up a failing market.'

Others would argue that the CAP is not there to help farms that are capable of being internationally competitive without large subsidies, but rather to promote rural development and help more marginal, peripheral farmers survive. One solution might be to taper subsidies above the €300,000 level.

In any case the policy might be difficult to implement. The legal definition of a 'farm' is far from clear. Jack Thurston of farmsubsidy.org warned that large farms might simply split up ownership to get round a cap.

Prices rise as demand for food for fuel grows

Earlier this week I gave evidence to an informal session of the House of Commons Environment, Food and Rural Affairs Committee. One issue that was raised was likely future trends in food prices, particularly after a further reform of the CAP.

However, long before that happens, mounting competition between fuel and food could drive up the cost of food. It would be a nasty shock for western consumers who have been used to falling real food prices for a long time, but the real hit would be on poorer people living in developing countries.

The US, the world's largest exporter of corn (maize) will convert as much or more of the grain into ethanol next year than it will sell abroad according to the United States Department of Agriculture. As petrol (gas) prices climb, farmers are diverting more of their harvest towards producing fuel rather than food or feedstock for animals.

Prices of corn have risen by close to 20 per cent as world grain stocks have fallen to their lowest level since the early 1970s. There has also been a substantial impact on world sugar prices which have doubled over the past year to a 25-year high. About 10 per cent of world sugar output is now used to produce ethanol. The figure is just 3 per cent for corn but it is rising fast.

Good world harvests over the past few years have concealed the impact of rising demand for ethanol. US energy legislation requires ethanol production to increase to 7.5bn gallons by 2012, requiring about 68 million tonnes of grain, more than the total grain harvest of Canada. Keith Colins, chief economist at USDA, noted, 'We are embarking on a profound change in our agricultural economy.'

Milk quota rules may face court challenge

Given that there's an internal market, it's always been a mystery why milk quota can't be traded across national borders (although some member states restrict trading within their own borders). Some farmers don't have enough quota, others have quota they would like to sell at a decent price and use the capital for other activities. Above all, trading quota would prevent the structure of the dairy industry in the EU ossifying in a way that made it even less internationally competitive than it is already.

Now the milk quota rules may be subject to a case in the European Court of Justice based on the principle of the free movement and trade of people, goods and services across EU borders. In February British milk quota trader Ian Potter managed to transfer several million litres of quota from Britain to Italy. Italy is only 56 per cent self-sufficient in milk production and the high price of quota is forcing dairy farmers out of business. The British farmers got more than they would have done in the depressed British market.

Potter was encouraged in this course of action by the sale of 200,000 litres of quota from Hungary to Italy last year. Following the signing of the quota transfer contracts in the Potter deal, forms were lodged with the Italian authorities and the English Rural Payments Agency. The RPA duly rejected the transfers, but the Italian authorities were less definite, saying that they did not believe that the transfer requests that were being used quite conformed to the current EU law.

While the self-styled Italian Milk Warriors wait for their day in court, the Italian authorities appear to be prepared to recognise the transfers for the time being and will not seek to collect superlevy from the fifteen Italian farms involved.

EU may give ground on tariffs in Doha Round

The EU has indicated that it may give further ground on the crucial issue of tariffs in the Doha Round of trade negotiations which are at increasing risk of collapsing altogether. However, by doing so, they have encountered resistance from some member states, while American sources think that the likely offer is insufficient. Hence the EU finds itself caught between a rock and a hard place.

The EU's current offer is to cut farm tariffs by an average of 39 per cent, an offer substantially diluted by its insistence that 8 per cent of tariff lines should be designated as sensitive and hence exempted from the cuts. The G20 group of emerging countries led by Brazil has asked for a 54 per cent overall cut, while the US is holding out for 66 per cent.

Press reports in Brussels suggest that the EU might increase its average cut to around 50 per cent. A spokesman for EU trade commissioner Peter Mandelson said that a 54 per cent cut was out of the question, but did not deny the possibility of an offer in the region of 50 per cent. There has, however, been no indication of a reduction in the percentage of tariff lines to be designated as sensitive.

The EU is also insisting on a quid pro quo, in particular a much lower ceiling for industrial good tariffs than the 30 per cent proposed by India and Brazil. The EU and US have previously asked for 15 per cent, but may be prepared to raise that figure by a few percentage points.

However, France has made it clear that it does not want further reductions in farm tariffs or subsidies without substantial concessions elsewhere. Moreover, a spokesman for the Austrian agriculture ministry (Austria is the current president) declared that 'Member states would be very surprised should there be a new EU offer on the table. A majority of member states have grave concerns.'

The office of the USTR confirmed that the EU proposal would fall well short of American demands. The US view that the EU should agree cuts of between 54 and 66 per cent and designate just 1 per cent of tariff lines as sensitive. It is this latter issue that is the difficult one as the EU could make quite substantial cuts in high tariffs and still maintain effective protection. Charles Grassley, the Iowa senator who chairs the finance committee which has lead responsibility for trade policy in the Senate, has stated, 'If Plan B is a minimalist approach, then don't bring Plan B to me.'

There's a long way to go and time is slipping away.

Grain mountain problem grows

The arable sector was the first commodity regime within the CAP to be reformed and it is often assumed that all the major problems are behind us, particularly with the abolition of rye intervention in the Fischler reforms, a product often grown just to sell into intervention.

Unfortunately, not all the problems have been solved. Support prices have been cut by around 45 per cent, but intervention stocks at the end of the last buying season were at their highest level for twelve years, 15,482 million tonnes and they look likely to rise again this year.

Much of current grain production in Eastern Europe is being grown with intervention in mind and doing anything about it is seen as a political hot potato as there is a reluctance to cause trouble with the new member states who are already feeling sore about other issues. Hungary has invested considerable sums of money in increasing grain storage capacity in anticipation of the increase in intervention stocks.

Franz Fischler was the first major figure to question whether one can really have a common policy in such a diverse agricultural region as Europe. A recent study for the Commission by consultants LMC argues that a single intervention price is a barrier to the flow of cereal from surplus regions, particularly landlocked regions like East-Central Europe, to the main grain deficit area, the Iberian peninsula.

The report also criticises set aside (the rate is 10 per cent in western Europe) as a blunt policy instrument which mainly benefits the United States. Set aside land is generally 30 per cent less productive than land not set aside (our local farmer has chosen his worst drained and smallest field) and producers in East-Central Europe are exempt until at least 2009. The US goverment gains because set aside pushes up world prices and hence cuts their outlays on deficiency payments.

The report has some sensible but radical solutions such as having only one intervention price based on common wheat, getting rid of set aside, limiting support payments to the grain barons and purchasing only breadmaking wheat and then just in Spain and Portugal.

Unfortunately these ideas would upset the powerful big grain producers in the EU and are hence unlikely to be adopted, so the grain mountain will just keep on growing.

EU isolated on sensitive products

The EU is looking increasingly isolated over the question of 'sensitive' products in the stuttering Doha Round, even though it may be prepared to give ground on its insistence that eight per cent of product lines should be deemed 'sensitive' and given special levels of protection. However, it is now the only major player insisting that tariff quota increases for such products be calculated as a percentage of imports rather than a percentage of domestic consumption.

The World Bank has pointed out that the designation of only 2 per cent of products in developed countries and 4 per cent in developing countries as sensitive would 'virtually eliminate the poverty impacts of a Doha agreement.'

Of course, what 'sensitive' means is 'politically sensitive in the EU and in particular in key member states'. Sugar is a very likely candidate for this treatment. However, the EU confectionery industry is arguing against further protection, pointing out that it is being undermined by imports of cheap confectionery from Asia. They argue that if sugar became a sensitive product it could cost them €1.2bn a year which would go into the pockets of the sugar industry.

As it so happens, the world price sugar is increasing anyway because of rising oil prices and the consequent diversion of greater quantities of sugar, in particular in major producer Brazil, for ethanol production.

Threat to farming in East Anglia

East Anglia is one of England's most productive and intensively farmed regions but it may not be producing arable crops in quantity for much longer if a report from the rural advisory service ADAS is to be believed.

Farming is the most important diffuse source of water pollution in the EU and tough new targets to reduce it have been set by the EU's framework directive on water quality. According to ADAS, the pollution from chemically intensive farming is proving highly difficult to control. Despite an overall reduction in the use of fertiliser and pesticide additives avross the region, levels of diffuse nutrient pollutants in UK waters are continuing to rise, posing a significant threat to acquatic wildlife and, in the long term, public water supplies.

The problem is particularly serious in East Anglia because of the relatively dry regional climate, which is gradually becoming drier and warmer because of global warming. This means that there is less rainwater available to dilute water contaminants.

ADAS concludes that the problem can only be addressed by significant changes in land use, including the removal of sizeable tracts of farmland from production. As much as half of the arable land in East Anglia could have to be converted into unfertilised restorative grassland or forest.

NFU sources are sceptical, however, that the problem is quite that serious, arguing that there is a get out clause that takes account of economic impact.

Doha prospects look bleak

The prospects for progress in the Doha Round trade talks are looking increasingly bleak with some analysts doubting whether a successful conclusion will be possible. The political shakeup in the Bush administration does not help. USTR Rob Portman will be leaving his job to head up Bush's budget team.

Portman was brought in by Bush 11 months ago to negotiate a successful outcome to the Doha Round. His replacement is being interpreted by some as a sign of reduced US interest in the round. His replacement, the current deputy Susan Schwab, is regarded as a knowledgeable trade lawyer but as lacking the political clout of her predecessor who was well connected in Congress.

There is concern about how far Europe can negotiate effectively given the weakness of the new government in Italy and the continuing political upheaval and uncertainty in France which faces presidential elections next year. German Chancellor Angela Merkel may be required to take a leadership role.

It is now clear that the April 30 for agreeing modalities in agriculture (i.e., hard numbers) which was set at the Hong Kong ministerial will now be missed. The only area where progress has been made is on the Blue Box where there is broad agreement that the figure at which spending would be capped could be reduced from 5 per cent to 2.5 per cent of domestic spending. But there is still an argument about whether this discipline can be made effective, e.g., by introducing commodity specific disciplines.

Irish farming faces big shake up

Irish farm minister Mary Coughlan

One sign of the onset of big changes in European farming is a radical shake up in Irish farm policy. Ireland has generally been a staunch ally of France on CAP issues, while constituency politics reinforced by the STV voting system has ensured that farm interests have been paid due regard by policy makers.

However, farm minister Mary Coughlan has launched a new agri-food policy. She said that policy needed to reflect the reality of decoupled payments, different consumer lifestyles and increasing competition arising from a new WTO deal. Competitiveness, she said, was a life and death issue for farms and food firms.

Her message has been reinforced by the Assistant Secretary General of the Department of Food and Agriculture, Tony Burke. He warned in a speech in London that Ireland would have to be flexible in facing up to the shock of lower producer prices and increased imports in the years to come. 'Agriculture has to become a modern, hi-tech, consumer-drive process', he declared. In a country that produces nine times as much beef as it needs, 12,000 tonnes were imported from South America last year, reflecting the growth of fierce competition on the world market.

The first consequence of the new policy has been the establishment of a commercial milk quota exchange. Coughlan argued that a new, market-led approach to quota transfer was required to put the dairy sector on a competitive footing for the future. At present less than 4% of the milk produced in Ireland is restructured annually and there is little incentive to transfer quota.

However, traditional rural lobby, the Irish Creamery Suppliers' Association, described the move as 'rash' and 'utter madness'. Which probably means that Coughlan has got it about right.

France reasserts CAP leadership

France has sort to reassert its traditional leadership of European agricultural policy with a paper presented to the latest Farm Council setting out a vision for the future of the CAP. The paper can be seen as a riposte to the liberal agenda set out by Britain in a paper of its own last November.

The French paper received a far more favourable reception than that from Britain. Only Denmark, Sweden, Latvia and Britain spoke out against the French paper which was endorsed by Germany, Italy and Spain among other countries. A centrepiece of the paper was a call to shore up the incomes of farmers in the face of increasingly tough markets.

Meanwhile, Commissioner Fischer Boel's head of cabinet, Poul Skytte Christopherssen implicitly criticised Britain by stating that 'complex questions about the future of agricultural policy are not boiled down to the single issue of money.' However, he insisted that his boss 'has always been a reformer. She remains, and will remain, a reformer.' Maybe. But she is no Franz Fischler in terms of having a comprehensive vision for the overhaul of the CAP.

Now Arla enrages Danes in cartoons row

Danish dairy giant Arla has been trying to placate consumers in the Middle East insulted by the publication of cartoons of the Prophet Mohammad. But in trying to build bridges with Islam it has upset some consumers in Denmark.

Arla placed adverts in 25 Middle Eastern newspapers rejecting the widely held Danish view that the publication of the drawings was defensible as freedom of expression and should not be apologised for. The action was praised by a meeting of influential Islamic sholars in Bahrain. The conference decided to open talks with the company which could pave the way for an end to a boycott that Arla says is likely to cost it €53.6m in lost sales this year.

Back in Denmark, howver, some domestic consumers are outraged at what they see as an abandonment of Danish values, arguing that Arla's need to make money has been put before freedom of expression. 'Some of our consumers are furious', admitted an Arla spokesman. 'We don't often get this many consumer responses about the same issue within a few days.'

Tescophobia

This term will not mean much to the preponderantly international readership of this blog, so some explanation is necessary. Britain has a highly concentrated grocery retail sector with some 30% of the market held by one firm, Tesco (which has some international presence in Eastern Europe, Thailand etc.) The next two biggest players in terms of market share are Sainsbury's and Asda which is owned by Wal-Mart.
Some versions of the theory of monopoly would argue that 30% comes close to being a dominant position and the UK's Competition Commission has launched yet another investigation into the retail grocery market.

Tesco used to be known as the 'pile it high and sell it cheap' store in comparison to the more up market Sainsbury's, but it has cleverly positioned itself in mid-market, overtaking the faltering (although now recovering) Sainsbury's in the process. Marks and Spencers and Waitrose (part of the John Lewis Partnership) tend to be more up market, the Co-op appeals to the ethical consumer, while Asda and Morrisons compete on price.

A number of charges are laid against Tesco and the other big supermarkets. One is that they use their market dominant position to squeeze the margins offered to processors and farmers, while continually requiring higher quality standards. However, their suppliers are understandably unwilling to come forward with evidence of demands for a range of additional payments, e.g., for store openings.

Another charge, and one that has led to the current investigation, is that by opening smaller outlets in town centres (rather than their usual edge of town locations) they are driving out of business convenience (or what Americans call 'mom and pop') stores. This has received a receptive hearing from the media and legislators, although in my experience many of these stores offer high prices and poor service. However, never let market forces get in the way of an emotive argument.

I have to confess that we do our shopping at Tesco's every week. There are those who argue that it would be cheaper if one went to a succession of small shops and that one would also get better quality produce. This may be the case, but the only specialist shop we use regularly is a fishmonger. What the critics forget is the time costs that specialist shopping entails. In today's society where many people are cash rich and time poor, that is a relevant consideration.

Government has also been very reluctant to act against the supermarkets because they bring benefits to consumers by holding down prices through competition and the use of their market position. This helps to restrain inflation and particularly benefits a key New Labour constituency, working people with families.

Tescophobia is rife among the 'chattering classes', i.e., the articulate and well educated members of the class with access to the media. But, as Tesco themselves say, what shoppers do is more important than what they say and they continue to pour through the doors of the supermarkets.

Where Tesco may be vulnerable to a competition enquiry is its possession of 'land banks' of attractive retail sites which it is alleged it hoards to keep rivals out of the market. Sometimes land is very scarce in prime locations, however. Gerrards Cross is one of the richest communities in England. The only place Tesco could find to build a store was over the railway line. They built a tunnel over it which then collapsed, fortunately with no trains going through it.

Supermarkets like Tesco are trying to expand their global reach, while France has relaxed laws designed to protect small shops, so these are not purely British issues.
Globalisation and concentration in retailing is likely to be a continuing trend.

Big shakeup faces EU dairy sector

Shoppers visiting Asda (Wal-Mart owned) stores in the UK have been greeted by dairy farmers complaining about the low prices they receive for their milk and the margin claimed by the processors and retailers.

Some dairy farmers are certainly finding it hard to make a profit, but bleaker times may be ahead for the sector across the European Union. If the planned phase out of export subsidies goes ahead, let alone tariff reductions, dairying will be hard hit. It depends to a large degree to the export of surplus product on to the world market under written by EU subsidies.

The EU is closely behind the climatically favoured Kiwis as the world's leading exporter of butter and skimmed milk powder. However, whereas New Zealand's success reflects its lush pastures and absence of really cold weather in most of the country, the EU spends close to €1 billion a year to help its exports on the world market. When export subsidies go 11% of total EU butter production and 18% of skimmed milk powder will have to be absorbed on the domestic market.

When the current reform programme is completed in July 2007 the EU butter intervention price will stand at €2463 per tonne. Calculating the world market price is notoriously difficult because in practice there is no one world price, but Dairy Markets estimate it at around €1570 to €1650 per tonne. The world market price could well go up, particularly if dairy production falls in Europe, but not to an extent that would close a gap of €800 a tonne or more.

There may be particular implications for the UK market. Dairy UK chairman David Curry has warned that 'There is a danger that if the export route is closed, big volumes of Irish milk will be seeking a home on the British market at heavily discounted prices.'

All this helps to explain why the EU is so keen to keep as many tariff lines as possible within the 'sensitive' products designation in the Doha Round talks and also to ensure that any tariff cuts for sensitive products are as low as possible. What the EU wants is to limit the amount of trade in the sector while retaining as high a level of domestic support as possible. One reason it has painted itself into a corner is the decision to retain dairy quotas, an artificial market restraint if there ever was one, until the middle of the next decade.

However, other products like beef and poultry meat also have claims for 'sensitive' treatment, so dairying is unlikely to get all the protection it wants. Which is perhaps why it is the most efficient and innovative dairy farmers in the UK are getting out of the business and employing their capital where it can earn a better return. Those who cannot think of any alternative activity tend to stay on and try to eke out a living. They are the farmers likely to be found demonstrating at Asda (although some of their fellow farmers have argued that they should be dropped as Asda suppliers). The irrationality of exit patterns could be regarded as a market failure.

Be very, very afraid

David Richardson is an East Anglian arable farmer who has a regular column in Farmers Weekly. I met him once and he is a nice guy. But he is also an eloquent exponent of the notion that farmers are hard done by and should continue to receive substantial subsidies from a grateful population. One of his regular arguments is that the food security arguments used when the common market was founded are just as valid today, only now the threat comes from terrorists rather than the Soviet Union. Exactly what terrorist incident would disrupt the food supply chain on a massive scale is never quite explained.

So one has to be very worried when Richardson, who is usually whingeing about the failure of Defra to 'back' farmers, praises a speech by an EU commissioner. Even more so when the commissioner in question is Peter Mandelson who has recently been showing his protectionist colours by using anti-dumping legislation to stop European consumers enjoying cheap shoes from China. 'Is Mandelson our mate?' is the heading on Richardson's column who is depicted with the kind of stick that was once used for poking pigs and the kind of cloth cap that only elderly farmers wear.

Well, is Mandy the farmers' new friend? What he did tell the National Farmers' Union annual conference was that the CAP is not obsolete and that agriculture as a sector cannot be treated like all others. Why not? Because 'It is too intimately connected to wider issues such as the environment, food security and the future of the countryside.' The reference to food security was particularly worrying as it can be used as a portmenteau justification for limitless subsidies, whereas one can attempt some valuation of beneficial externalities such as cherished landscapes.

The CAP has rightly been under the cosh for its impact on the Global South in recent years, but Mandy gave it large in the manner of his famous 'I am not a quitter' speech to all those softies with a misplaced concern about poor farmers. 'I am not going to be swayed by lazy political correctness into giving ground in agriculture simply because this will please a vociferous lobby that has misunderstood what is really need to tackle word poverty.' So Oxfam and all the other Global South NGOs can tear up their research right now.

Where he did encourage reformers was his declaration that it didn't make sense to spend over 40% of the Community budget on agriculture. He also recognised the reality that China was becoming the industrial workshop of the world, Brazil its most competitive supplier of bulk commodities and India a great service provider. The future for Europe was in providing top quality, knowledge intensive, value added food among other goods and services. In that he is right and David Richardson with his calls for shoring up self-sufficiency and cutting imports is wrong. The global food economy is here, there is plenty of room for high quality local products (backed up by a system of Geographical Indications), but this is time to cut back agricultural protectionism not to reinforce it. There is still everything to play for in the Doha Round.

Don't panic say Euro leaders as bird flu hits

EU farm and health bosses have called on European consumers not to panic as avian flu hit an indoor turkey farm in France despite efforts to prevent its spread from wild birds. The H5 virus is certainly not tranmissable in poultry cooked at over 70 degrees C., but consumer panic is difficult to stop and poultry sales are already estimated to be 30% down in France. Large quantities of French meat have been diverted to the UK wholesale market. There has been a 20% fall in Germany, but there has been a worse hit in Italy where retailers have experienced a 70% drop in consumption. In the UK Tesco reported that there had been no decline in demand for eggs and poultry meat with the message getting through that this is not a food safety issue.

So far the only humans who have caught the virus have been in close contact with flocks not kept in modern conditions. However, the influenza virus is susceptible to mutation and it is at least possible that the avian flu could combine with human strains to create a new pandemic (an influenza pandemic is overdue in any case). Stocking vaccine might be of little help as it might not be able to counteract a new version.

Additional deaths in the UK in the event of a pandemic are estimated at least 50,000 and there would be considerable economic disruption from people failing to report for work. The food supply chain would certainly be affected. The fact of the matter is that just because we are in the 21st century there is no technological silver bullet that can stop a flu pandemic, any more than anyone could stop the pandemic that killed my grandmother at the end of the First World War.

As far as animal health is concerned, the EU has allowed France and Germany to vaccinate poultry. The decision marks the first significant application of the EU's new policy, adopted after the 2001 foot and mouth outbreak, of allowing selective vaccination of farm animals despite the possible impact on trade. The EU's view is that because bird flu is a global problem vaccination is unlikely to hit trade.

However, opinion on the vaccination issue is divided. Countries such as Germany believe that the advantages are outweighed by the costs (around €0.2 to €0.3 on a commercial farm) and the fear that the symptoms of the virus can simply be masked rather than eliminated.

In Britain Defra's view is that the vaccines currently available are slow to work and do not stop infected birds transmitting the disease to others. Fred Landeg, deputy chief veterinary officer at DEFRA said, 'Though these vaccines protect against the disease, they will not prevent birds from becoming infected and shedding virus. It can take up to three weeks to develop immunity, and some poultry require two doses.'

Danish dairy firm hit by cartoons row

Trade between Denmark and the Middle East may take years to recover from the row resulting from the Danish newspaper Jyllands-Posten publishing cartoons featuring the prophet Mohammed. This has sparked a boycott of Arla's products in Muslim countries.

The boycott is reported to have cost Arla Foods £1 million a day and by the end of last week it was reported to have lost between £40m and £50m. Some 170 employees across Denmark have been sent home due to the impact of reduced sales. Arla Foods is also a big player in the UK dairy market, but no effects have reported there.

The widespread boycott of Danish goods by Muslim consumers led to an almost complete halt in sales in the region leading Arla to suspend production at its Saudi Arabian plant. Arla products have been removed from shelves completely in Kuwait, Qatar and the United Arab Emirates. The company describes the situation as 'critical' in Yemen, Egypt and Lebanon and notes that there have been demonstrations in Algeria.

Arla's executive director Finn Hansen said it would take a long time for the Danish dairy giant to re-establish the business and good trading relations it had in the Middle East which was its main market outside Europe. Establishing a presence in such markets is an essential part of the EU dairy industry's strategy to survive the phasing out of export subsidies and likely tariff reductions as a result of eventual agreement in the Doha Round.

Grain mountain growing

There is a common assumption that intervention mountains are a thing of the past. This is not necessarily the case. The EU's grain mountain is growing fast and looks like getting bigger.

It is now at a highest level for nearly a decade. At the start of the 2004/5 there were just 5mt in store. By the start of the 2005/6 marketing year this had trebled to 15.48mt. By mid-January, assuming that all grain submitted into intervention, the potential total was 18.6mt. And with nearly five months of the buying in season left, the stockpile could rise to 20mt or more by the end of May.

The problem is concentrated primarily in five countries in the middle of Europe - Germany, Poland, Hungary, the Czech Republic and Slovakia. These five countries accounted for 93 per cent of the nearly 7mt offered in intervention between November and mid-January.

These countries have experienced two strong successive grain harvests? One might think that they could have sold the grain to drought hit Spain, but transport costs by road were roo high. The rationalisation of the region's pig and poultry markets prior to EU accession has limited the size of the feed market. And to the east, competition from the main Black Sea producers is fiercer than ever before.

So those, like the Austrian presidency, who are calling for a period of stability in CAP reform should remember that many of the old problems are still with us.

2014 could be zero hour

The year 2014 could be zero hour for a new look CAP argues Agra Europe. By then export subsidies should have been phased out and the current financial perspectives agreement will have expired.

The EU budget deal does contain provision for a wide ranging review of the CAP in 2008/9, but no timetable for reform is built into it. France has effectively locked the CAP into current spending patterns with the deal it secured in 2002. What has changed, however, is that spending on new member states Romania and Bulgaria will have to be accommodated within the budget ceiling originally agreed for 25 member states.

Meanwhile Commissioner Fischer Boel has revived the idea of a €300,000 limit per farming enterprise (what actually constitues a 'farm' is not easy to define) on CAP payments for discussion in the 2008/9 review. This is like a red rag to a bull with the UK who scuppered the idea along with Germany in the 2002 negotiations. The UK's argument was that such a ceiling would penalise 'efficient' farmers, but its real concern was that it would hit the many large-scale farmers in Britain, including members of the aristocracy and the royal family.