How can direct payments be justified after 2013?

This is the question that former OECD trade and agriculture supremo Stefan Tangermann poses in a recent issue of Agra Europe. In effect the answer that the agricultural economist gives is that they can't be, although he is too canny to say that in so many words. But he takes each argument for the SFP in turn and demolishes it.

He points out that direct payments make up nearly three-quarters of EU expenditure on the CAP, equivalent to about one third of the Union's total budget. The argument that they are compensation for earlier reforms can no longer be used to justify their continuation.

What about the view that farm incomes lag behind incomes in other parts of society, which in fact is not necessarily the case? Then payments would have to be in line with the criteria for other income support policies. It would have to be means tested so that better off farm families received less. Moreover, payment would have to be higher in member states where the gap was greater which is not compatible with the idea of a level playing field in a single market.

What about the food security argument, the desire to safeguard a viable agriculture in Europe? Tangermann points out that empirical studies show that farm support is largely capitalised in land values. Where land is rented, most of the direct payments flow to landlords. If support was eliminated, 'Land rents will adjust and farming continues.' This perhaps reveals an economist's faith in automatic adjustment in functioning markets. In fact adjustment would probably only occur after a time lag and then not fully. That delay could be cricial for some farmers.

What about enhancing competitiveness? Tangermann points out that competitiveness depends on productivity, know-how, product quality and the like. Education, training, extension services and research and development are the policies that help, not per-hectare payments.

What about the argument that environmental and other standards are more demanding in Europe than other parts of the world? Tangermann notes, 'Research has shown that they differ very much from sector to sector within the farming industry, but also from farm to farm. Overall, though, any such extra costs are relatively small, certainly much smaller than the level of payments currently granted to EU farmers.'

What about cross-compliance? Most of the requirements under cross-compliance would have to be respected anyway: 'Justifying payments on these grounds is akin to granting payments to all car drivers, which are then claimed back from drivers exceeding speed limits.'

So Tangermann concludes that it is doubtful whether any credible justification can be developed for direct payments. But when he gets on to political ground is touch is less sure. Having a good case matters, but there is also a lot of raw power politics surrounding agriculture with many member states willing to spend political capital to defend their farmers. Tangermann says that 'Europe's taxpayers are keen to know why they are expected to finance such payments', but I see little evidence of such interest. Hence, it is possible for agricultural lobbies to mount 'business as usual' arguments with little effective challenge.

Subsidy trade is on the up

Trading of single farm payment entitlements is almost double that of a year ago with prices noticeably higher than in 2009. English flat area or area-only entitlements are changing hands at about £185 a hectare while a full entitlement is worth £225 a hectare. Some purchasers were those who had taken on land without entitlements. Others were speculating on the current subsidy mechanism being rolled on after 2013 or hoping that if the system is dismantled, there could be some form of compensation.

It may seem odd to have a brokered trade in subsidy entitlements, but some economists would argue that it is a second best solution that allows them to be allocated where they are most needed in terms of ability and willingness to pay.

Sarko accepts budget cuts

President Sarkozy has accepted the reality of CAP budget cuts, provided they are offset by greater import protection for farmers: Sarko

Farmers do not lack protection as it is with many tariffs in the three figure range. Sarko says that imported products should be produced to the same standard as in the EU which sounds reasonable enough but in fact is a way of excluding developing country exports altogether.

Continued need for market support

A paper circulated by the Spanish presidency has argued for keeping a strong arsenal of market support measures within the CAP. The paper includes a series of graphs showing the volatility of EU and world food commodity prices, even before the 2007/2008 price spikes.

It is argued that a strong budget is needed to support such measures. Among those specifically mentioned are intervention buying, private storage aids and export refunds. It is evident that the perceived food security crisis is breathing new life into policy instruments that seemed to be on the way to extinction, encouraging those who hope for a 'business as usual' model for the future of the CAP.

The paper does mention earnings and incomes insurance, but does not back the idea pending assessments of the effectiveness of such a tool and its WTO compatibility.