Agricultural policy outside the EU

Whether or not the UK will leave the European Union remains to be seen, but it is a sufficiently serious prospect for it to be worth thinking about its implications for agricultural policy.

What one would probably have is a continuation of a version of the CAP at the national level. One of the constraints here is that the UK would still be a member of the World Trade Organisation and any agricultural subsidies it provided would have to be compatible with WTO rules. Indeed, it could be argued that recent changes to the CAP have been driven too much by the need to provide subsidies in a form that can demonstrate that they are compatible with the 'green box'/non-trade-distorting requirements of the WTO. Hence, the policy instruments may have been influenced too much by that requirement.

Within the discussion of the 'balance of competences' review of the CAP, one issue is how much 'renationalisation' there has been of the CAP. Certainly, there has been quite a considerable amount of recoupling which gives quite a lot of discretion to member states or their regional governments, but the basic principles of the CAP remain intact.

In any case, some would argue that the term 'renationalisation' is an inappropriate or old fashioned one. What has happened rather is the maintenance of a common policy design with national flexibility in policy implementation. Some argue that as the goals of the CAP have become more complicated, and in particular taken on a greater public goods/environmental emphasis, there has been a recasting of the form of the CAP (although it is possible to exaggerate the extent of this). What this requires is policy instruments that allow diversity of implementation in member states (but not to an extent that would satisfy Eurosceptics). It is, however, worth bearing in mind that a lot of policies affecting agriculture are nationally determined, particularly taxation and inheritance law and planning regulations.

It may be that the CAP can be characterised as a means of tackling the market failures associated with land management (but arguably a rather inefficient means of doing so). However, for some member states the occupation of land could be a key objective to prevent rural depopulation and secure the ecosystem benefits of farmed land.

One also comes up against the problem of a low level of competence in effective policy design and delivery. That is not a problem confined to the CAP, but is a general challenge for the EU and for member state governments, but it is particularly evident in relation to the CAP.

Cost of farmland likely to continue to rise

Knight Frank's farmland index reported a 7 per cent increase in prices in 2013 to reach an average of just under £6,700 per acre, and further growth is expected in 2014. Large blocks of investment grade arable land now regularly sell for over £10,000 an acre in the UK. In the past ten years, average values have increased by 22 per cent. This compares with a rise of 58 per cent for the FTSE 100 and 132 per cent for prime central London residential property.

Investors favour farmland because of its stability and tax incentives. A shortage of supply is also driving up prices, while growing global demand for food makes it an attractive long-term investment.

Mind the gap

HSBC head of agriculture Allan Wilkinson has drawn attention to the gap between returns from the market and costs of production, particularly in livestock enterprises. For beef the cost of production is £3.20/kg liveweight compared with a market price of just £2.10 so that only 60-70 per cent of production costs are recovered from the market. It costs £2.30 to produce a live kilo of lamb while market prices are at £1.75-1/85 kg lw. Thus, only 75 per cent to 80 per cent of production costs are met by the market.

These are, of course, average production costs and Mr Wilkinson emphasised the gap between the best- and poorest-performing farm businesses. He warned that unless the gap between the cost of production and returns can be closed, the size of the red meat sector will fall further and the industry will continue to decline.

Once again these figures show how dependent important sectors of British agriculture are on CAP subsidies which are bound to decline in the long run.

What do we mean by food security?

Food security has been a dominant element in recent debates on agricultural policy, not least the recent discussions on CAP reform. But what do we actually understand by food security? There are a number of standard definitions out there, but in fact various actors interpret the term for their own purposes. An important article in Food Policy by Jeroen Candel, Gerard Breeman, Sabina Stiller and Catrien Termeer, identifies six different interpretations or 'framings'.

Not surprisingly, the productionist and environmental frames were dominant, accounting for nearly 70 per cent of uses. Anyone who has followed the CAP debate is familiar with the productionist frame. It is the stock in trade of those who advocate a 'business as usual', 'more of the same' CAP. As the authors note, it 'revolves around a story line that considers food security as one of the key goals of a future Common Agricultural Policy.' World food crises increase the salience of this frame.

The policy conclusion that is drawn is that the CAP should maintain 'a strong first pillar.' Agricultural production and productivity should be stimulated, 'and should be considered as a form of public goods provision, for which a financial compensation is justified.' [Needless to say, I think that this is a spurious argument, but it is certainly widely deployed].

Whilst the productionist frame is the dominant one, the environmental frame accounts for almost a third of all uses. This is of itself interesting as such a prominence would not have been achieved fifteen or twenty years ago and shows how the debate about the CAP has been 'greened'. The provision of environmental services is seen as an integral part of European food production and the emphasis is on long-term sustainability which cannot be achieved by the continuation of current policy.

Interestingly, the third most used frame is the regional one which shows how the notion of food security can be appropriated for a range of purposes. I see this as a very political frame in the sense of securing benefits for a particular set of actors. The argument here is to look after less developed regions which it is argued cannot produce at world market prices. Farmers in these regions perform an important function as caretakers of the countryside. The Scottish Highlands and Islands are a good example. Although a continuation of the CAP is supported, the present distribution of funds is seen as unfair.

The free trade frame argues that food security is best achieved by free trade. The development frame critiques the impact of the CAP on developing countries. The food sovereignty frame offers a radical critique of traditional conceptions of food security and focuses attention on people's right to food. Historically, notions of equity did feature in the debate in terms of closing the gap in the standard of living between rural and urban areas, but this framing covers both consumers and farmers and is underpinned by notions of global solidarity.

Interestingly, the European Commission uses multiple framings, invoking various frames simultaneously. My take would be that various interpretations of food security can be utilised to justify whatever line the Commission has chosen to take. The consequence, the authors argue, is that a clear vision of the relationship between the CAP and food security is lacking and policy makers may need to develop a more coherent vision [although I would add that CAP decision-making processes rarely facilitate clear strategic thinking].

Not only is this article a very useful, empirically based overview of how the term 'food security' has been used in policy debates, it also provokes thought about where we might go in the future.

Farmland attracts institutional investors

There is nothing new about farmland attracting institutional investors. There was a surge of interest in the 1970s when it was seen as an asset that would hold value in inflationary times. However, there is a new wave of interest. The UK's £14.9bn Pension Protection Fund has recently appointed a farmland manager. In the US, TIAA-CREF had built up a $4.4bn portfolio by July 2012, encompassing more than 800,000 acres across four continents.

What's the attraction? It gives exposure to commodity prices as well as the return from production. Demand for agricultural commodities is growing as developing countries become more prosperous while supply is constrained by such factors as the availability of land and an assured water supply. Investing capital in, for example, machinery or irrigation could drive up the value of the asset as well as returns.

The downside is that this is not a liquid asset. Investment has to be for the long term. Yields can be impacted by weather events, the uncertainty and magnitude of which could increase with climate change. There are also political risk issues associated with subsidies, trade regimes and tax structures.

What is required is specialist knowledge of the sector. It is important to focus investments in locations that have good soil quality, reasonable infrastructure and access to the markets where growth is occurring. Many investors have been attracted to Australia for those reasons.

There are also potential ethical problems. Swedwatch has criticised Sweden's national pension fund AP2 for a lack of transparency on its Brazilian farmland investments: Swedwatch . It suggests that there may be serious negative impacts on the environment and human rights. Common problems include high use of pesticides, poor working conditions and a loss of biodiversity.

Can Doha lite succeed?

As trade ministers gather in Bali the question is can a 'Doha lite' agreement be concluded to rescue something from the Doha Round of trade negotiations? Or will agreement once again be foiled by arguments over agriculture?

The developing world will still want the US and the EU to stop export subsidies for their farmers, although those paid out by the EU have shrunk away to a fraction of what they were: Export subsidies . Cotton farmers in Africa will still demand better access to the American market and a reduction in domestic subsidies. Sugar cane growers in Australia and Brazil also want better access for their products.

However, the real sticking point could be Indian insistence on rewriting the rules of the WTO on food security programmes. A 'peace clause' was agreed, intended to give another four years to negotiators to come up with new WTO rules for farm subsidies and the prices paid for staples bought as part of government programmes to supply food to the poor. 70 per cent of the Indian population is covered by such programmes which have recently been extended by legislation and there is a general election due next year. It now appears that India wants the clause to be permanent or at least apply until a final deal is concluded.

Decline in meat eating claimed

A quarter of the British public say they have cut back on the amount of meat they eat over the past year, new research for the Eating Better alliance revealed today. Only 2% say they are eating more.

The YouGov survey of the British public (1) commissioned by Eating Better found around one in three (34%) say they are willing to consider eating less meat, with a quarter (25%) saying they have already cut back on the amount of meat they eat over the last year. Ready meals, and processed meats are most likely to be off the menu. Eating Better says this suggests the public remain wary, following the horsemeat scandal, of cheaper meats that are likely to be less healthy, of unknown origin and poorer quality.

Concern for animal welfare topped the reasons for considering eating less meat, ahead of saving money, food quality/safety and health. The survey found a large increase in awareness of the significant environmental impacts of producing and eating meat from just one in seven people (14%) in a YouGov survey for Friends of the Earth in 2007 to nearly one in three (31%) in 2013.

The most dramatic change has been in young people (aged 18-24) where there has been a five fold increase in awareness from just 8% in 2007 to 40% today. Young people were nearly 3 times more likely to say they don’t eat any meat at all – compared to the survey’s average – with one in six (17%) of young people saying they don’t eat any meat. Despite rising food prices, around half those surveyed said they would be willing to pay more for ‘better’ meat if it tastes better, is healthier, produced to higher animal welfare standards or provides better financial returns to farmers. Willingness to pay more was not restricted to higher (ABC1) social grade groups.

What the survey does not make clear is by how much people have cut back on the meat they eat. However, it is not good news for the hard pressed livestock industry.

The promise of precision farming

It has been estimated that the use of precision agriculture technology could increase yield on any given farm by about 10 per cent, compared with average global annual crop yield increases of about one per cent. Tractors that map fields, drive themselves and precisely calibrate their movements to within inches to minimise wasted fuel, fertiliser or seed are increasingly becoming a standard piece of kit.

Auto steer has been around for about 15 years, but the focus is increasingly on remote sensing and data collection on the dozens of variables, from soil moisture to nutrient levels, that influence success in modern farming. Agricultural companies are trying to make better use of the vast caches of data that farmers generate in areas such as yield and soil mapping, although some farmers have privacy concerns and want to limit the amount they share with big companies.

Monsanto recently spent nearly $1bn acquiring data science company Climate Corporation. Companies clearly see commercial opportunities in relation to climate change, but there is controversy about whether weather derivatives have the market smoothing effect that is claimed for them: Climate data

The final shape of CAP reform

A rural surveyor takes a look at the final shape of CAP reform, noting that, as always, the devil is in the detail with many points of implementation still to be resolved: CAP reform

He also notes the different perceptions between the UK and other member states with the reform being seen as a missed opportunity here and a substantial achievement elsewhere.

Subisdising oil seed rape

The threatened reduction of oil seed rape subsidies for biofuel from 10 per cent to 5 per cent is concerning some farmers who say that it will no longer make economic sense to grow the crop. Of course, one might ask whether such a market distorting subsidy was sensible in the first place which is why the UK and other member states such as the Netherlands would like to see it reduced.

However, for farmers on heavy land in particular oil seed rape has great advantages as a break crop. There aren't that many alternatives. Peas are very sensitive to weather conditions, particularly rain, and the returns on sugar beet are not that good.

Oil seed rape is also favoured by beekeepers as it flowers early in the season and produces plenty of pollen.

Why farmers have to hedge currency risk

One hundred years ago in 1913 the weather was also warm for the time of year with people claiming that it was too hot to play football. It all ended in a big thunderstorm here in the Midlands. According to a Farmers Weekly poll, the overwhelming majority of farmers still think they have been hit by the weather last winter and the wet and cold spring, the second in a row. I have been growing tomatoes in my greenhouse for over thirty years and this is the worst year I can remember (and, of course, I don't get a SFP!). In these circumstances subsidy payments become more important to farmers to maintain their cash flow.

Along with the uncertainties of the weather, farmers also have to face currency risk. Indeed, some of them follow the forex market as keenly as they keep an eye on the weather. The recent rally by sterling is not good news for farmers as September 30th is the day when their farm subsidies are translated from euros into pounds. (From next year it will be calculated as an average for the month). The pound has gone up by about two per cent since May when they submitted their claims.

A growing number of farmers are resorting to hedging their currency risk. According to Alick Jones, agriculture policy director at Lloyds TSB, about a third of their clients in receipt of the single farm payment hedge their currency risk. However, the Royal Society for the Protection of Birds, which receives £1m in subsidies as a big landowner, doesn't follow this practice.

It was interesting to read in yesterday's Financial Times report on this topic that on one 450-acre livestock farm in Anglesey, the single farm payment of about £30,000 represents about 40 per cent of profits. In the long run, such a dependence on subsidies cannot be healthy, as many farmers themselves recognise, but for now they are an integral part of the business model.

Farm subsidies up again across the world

A long-term trend towards a decline in farm support was reversed in 2012 according to the Organisation for Economic Cooperation and Development (OECD): OECD Report

This is perhaps a surprising development, given that government budgets are under pressure and farm subsidies offer a possible, although well-defended target. However, the OECD noted a particular trend towards increasing support in countries that emphasise self-sufficiency and they think that this has a poor relationship with food security.

This is a concern as self-sufficiency has been raised again recently in the UK debate by the NFU. Admittedly, there has been a decline in self-sufficiency in indigenous food between 1984 (95 per cent) and 2012 (76 per cent). (When foods from non-temperate climates are added in, the figure drops to 62 per cent). One might ask what the relevance of this is given that the UK operates within the CAP, but if the UK was to leave the EU this kind of discourse might become more relevant.

Admittedly, the overall increase in subsidies was 1 per cent, but that masked some sharp increases in emerging countries: 4 percentage points in China to 17 per cent of total income; 6 percentage points in Indonesia to 21 per cent; and 4 percentage points in Kazakhstan to 15 per cent. Norway provided the largest level of farm support with a 63 per cent share, up four percentage points. Switzerland, Japan and Korea were all over the 50 per cent of farmers' income level.

Farm support in the EU was consistent with the general trend, rising from 18 per cent to 19 per cent of farm incomes.

The search for a British baked bean

I spent an enjoyable afternoon at the Warwick Crops Centre (formerly Warwick HRI) Open Day at Wellesbourne yesterday. In part this was because of the opportunity to catch up with former research collaborators (and hopefully future ones), but there were also many interesting exhibits and a good crowd in attendance. My overall impression was that the Crops Centre is now in a more stable position than it was and able to make a real contribution to the need for applied research in agriculture that is of value to farmers and growers.

I was particularly interested in the exhibit of growing haricot beans. Baked beans are a staple of the British diet and they are very nutritious, although possibly they could be prepared and cooked in more interesting ways than being doused in tomato sauce (having said that, I do eat them in that format). At one time production was centred in Michigan, but we now mainly import them from Canada.

They are difficult to grow in the UK because they are sensitive to cold. Some twenty years ago work was done on a British variety of 'navy' bean (I'm not sure where the terminology comes from) but then the funding ran out. However, with a new emphasis on food security, BBSRC has come up with some funding for the work to continue.

Two types of bean were being grown, one that is disease resistant and one that is cold resistant. One of the varieties was white rather than the usual colour which would require some re-education of consumers. The hope is to combine these to produce a bean that is both cold and disease resistant which could then be grown in the UK. How economic this would be, even with an improved variety, is an open question. The plants seemed to be smaller than their counterparts in Canada.

Nevertheless, it is an excellent example of applied research and you can read more here: Baked beans

Can Scottish farmers be weaned off subsidies?

One of the claims being made in the Scottish independence referendum debate is that if Scotland had a seat at the negotiating table, its farmers would get much more way in the way of CAP subsidies. But is such a dependence on subsidies desirable when English farmers are being urged to orient themselves towards the market? This provocative piece from a New Zealander suggests that it can become tantamount to an addiction: Subsidies

Of course, as the writer recognises, farming in the remoter parts of Scotland faces special challenges, but these are better tackled under the umbrella of a rural development/remote areas policy rather than through blanket subsidies. Moreover, the treatment of the Highlands and Islands has not been ungenerous, particularly when compared with England's isolated Scilly Isles, a subject I have been tackling in a series of articles for Scilly Now and Then. The magazine's website is here: Isles of Scilly

China's new line on corn imports could affect world market

Changes in supply and demand patterns for food in China can have important implications for world markets. Even a small increase in Chinese imports can influence world markets in which there is a tight balance between supply and demand, as well as offering new export opportunities for farmers. Many of these decisions are politically determined and there appears to be a significant change in the line of the central authorities on corn (maize) imports recently.

Since 2001 when China lowered its import barriers, a policy of self-sufficiency has been followed in relation to corn, rice and wheat with imports kept to a minimum. In contrast the soyabean market was opened up to imports to release land for the key staples. China has become the world's largest importer of the oilseed, representing 75 per cent of global seaborne trade.

Last year China's agriculture minister Han Changfu said that corn 'should not become the second soyabean.' Recently, he has modified his line, saying that corn imports would have to increase gradually to meet demand for animal feed which in turn reflects growing prosperity and higher levels of meat consumption. It appears that China envisages importing 20-30m tonnes of corn a year, the lower figure representing 10 per cent of consumption. While China's grain output is at record levels, there are evident strains with urbanisation using up farmland and problems with water supplies.

China does not want to be solely dependent on the US and is encouraging exports from Argentina and the Ukraine.

Finance for farmers

Back in the 1990s I was involved in a research project led by Will Coleman from Canada which looked at how farmers got their finance. I interviewed all the clearing banks in Britain and Ireland, plus a specialist institution called the Agricultural Mortgage Corporation which was set up by government in the 1920s but by then was being absorbed into the private sector.

The general pattern was for banks to have a specialist agricultural manager at head office who, with local managers, kept in touch with the farming community. Farmers were seen as a very safe bet. They rarely defaulted and, even if they did, you ultimately had the land as an asset, although banks were very reluctant to foreclose. In many ways it was a very traditional form of banking. A relative who is a farmer was tipped off by his bank manager about a suitable farm to buy to diversify his business.

There's still plenty of need for finance for land and capital equipment. Those who inherit a farm sometimes have to buy out siblings. They may also want to buy additional areas of land to secure economies of scale. Finance is important if agriculture is to meet the challenge of increasing and more sophisticated demand and relatively finite supply, particularly of land suitable for farming. Food production will need to rise by at least 60 per cent by 2050 to feed a rapidly growing world population that is increasingly able to demand more resource intensive foods such as meat which create additional demand for animal feed.

However, since the financial crisis banks have been cutting their loan books, while the price of land continues to rise, stimulated by the availability of subsidies, good long-term demand for food, tax breaks and, in parts of the UK, the dual use of farms for sporting purposes. However, new types of finance provider are emerging like Aquila Capital of Hamburg.

Aquila actually buys equity stakes in a farm which could be as much as 70 per cent. However, they claim that it works more like a debt. They receive a guaranteed 3 per cent a year, although there might be circumstances in which the farmer had to borrow to meet this requirement, increasing the debt burden. The farmer receives the next tranche of income and the remainder is split 70-30 in Aquila's favour. It is envisaged that such investments will yield pre-tax, post-free returns of 5-7 per cent a year which are attractive in current circumstances. Savings accounts are typically paying less than 2 per cent and relatively few companies pay dividends above 5 per cent (and may not be able to sustain them). 4 per cent would be a good return on an income fund, although you should be able to get over 5 per cent from a peer lender, depending on how much risk you might be able to take.

Whether it is a good deal for farmers is an interesting question, but needs must. Aquila also claim that after 15 years or so farmers will have accumulated enough capital to buy them out.

The capping controversy

A full and very informative blog post here, although the English is a little stilted in places: Capping

I would just make a couple of points. First, it is always possible that businesses could be split into distinct legal entities to avoid the rules. Second, the last paragraph of the post points out that many wealthy estates benefit from large CAP subsidies.

However, this brings us back to the question of what the CAP is for. If its main objective is to help poor or marginal farmers, it is an inefficient means of doing so. (Actually, there are probably at least two objectives here, one an income distribution objective and one a rural landscapes/depopulation objective).

If one, however, one thinks that the CAP should be helping European farms and food processors to be globally competitive, larger farms are, in general, more efficient (and often more environmentally conscious and aware of animal welfare needs).

Devolution and agriculture

Devolution raises some tricky issues about who can do what and this interesting and informative blog post looks at a dispute involving the Welsh Assembly Government and the Westminster government that has gone to the UK Supreme Court: Devolution

Getting agreement on CAP is near impossible

Reflecting on the outcome of the CAP negotiations, NFU president Peter Kendall is critical of the decision-making process, saying that it is near impossible to reach agreement: Kendall. He makes a good point, but how could one start to change it, given the range of interests and institutions that have a stake in the way decisions are made?

A paradigm shift in CAP?

Gwilym Jones of the European Commission set out a vigorous defence of the CAP reforms at the Westminster Food and Nutrition Forum in London last week. He claimed that they represented a paradigm shift which would re-link farmers and citizens. It put farmers in greater control of their day-to-day economic choices.

Jones claimed that the greening measures were a game changer. They offered measures which protected soil, water and biodiversity (interestingly there was no reference to climate change.

One positive feature that Jones did draw attention to was that all payments to farms would be published, stating 'we have nothing to hide.' It remains to be seen what this move towards transparency means in practice and how accessible and reliable the data turns out to be.

Jones insisted that farming is different, asking what other industry faced exceptional weather events.

Chris Horseman of Agra Europe asked why decoupling had been put into reverse. Jones disagreed that this was the case, arguing that some sectors worked with very severe conditions, for example mountain areas. But this has always been the case and does not justify an extension of coupling.