Tuesday, May 31, 2005

Down on the farm

This page has been out and about in the past week visiting farmers and growers in various parts of the country. It's always good to touch base with what is happening in the real world of agriculture and to hear of the ingenuity and initiative which is being used to respond to some of the challenges the industry is facing. A few reflections ....


Advances in farm technology continue. At one location that was visited tractors are driven entirely by global positioning systems to produce more accurate rows, human intervention only occurring at the end of a row. I saw solar driven moisture probes which are then read automatically to produced detailed graphs of moisture levels in the soil to help plan irrigation. And I visited a vast glasshouse producing herbs in which most processes were automated and labour was most evident in the packing section.


Bringing all these complex processes together under considerable cost pressures and a need to pay greater attention to environmental considerations requires highly sophisticated management. Good technical managers are increasingly hard to find. And the weather can still spring nasty surprises. At one farm visited a salad crop had been devastated by a hailstorm.


Many planting and harvesting operations still require substantial amounts of labour and one important source for many growers is the Concordia scheme which bring in students from Eastern European universities. This scheme, I was told, is to be extended to China. Employers are very pleased with the quality and effort of the labour force and estimate they would require substantially more British employees to achieve the same level of output.

Retail pressure

This is increasing rather than diminishing. One enterprise had received visits from three different customers during one day that week. I saw lettuce in different shades of red being grown in adjacent plots to meet the specifications of different supermarkets. We also heard many stories of prices being forced down with the difficulties of some supermarkets make them even more price sensitive while requiring high quality standards.

Behind the supermarket is the ultimate customer who requires plentiful supplies of cheap food, good flavour, uniform appearance and grown with as few pesticides as possible. Not easy to achieve.

Sunday, May 22, 2005

Big row likely over new sugar reform proposals

The European Commission has come forward with new proposals for reform of the sugar sector which propose further cuts in support for the highly subsidised sector. Despite Commission denials, the proposals are intended to address the recent WTO decision which ruled so-called 'C' sugar exports illegal.

In fact DG Agri officials were secretly pleased when the WTO ruled against the EU sugar regime earlier this year, forcing the anti-reform camp to face up to reality. But the new proposals are likely to provoke a major row, with opposition from countries who would lose their sugar industries such as Finland and Ireland on the one hand and development NGOs on the other.

Under the new proposals the support price for white sugar would be cut by 39 per cent compared with 33 per cent in the original plans. The minimum beet price would be cut by 42 per cent compared with 37 per cent.

Planned automatic cuts in sugar production quotas have been shelved with the Commission favouring a voluntary quota buy up scheme which offer producers a financial incentive (a bribe in plain language) to get out of the sector. In the first year of reform (2006/7), producers will be paid €730/t for any quota surrendered, falling to €370/t over four years.

This quota buy up scheme is to be funded in part by a sugar buyers' levy which will be imposed at a rate of €125/t in year one, falling to €90/t the following year. These plans will upset sugar buyers who will lose most of the benefit of the lower market prices. Despite this subvention, the scheme is going to cost taxpayers with a budget of €896m set aside in year one of the reform programme, rising to €1.5bn in year two. A lot of this money will go to 60 per cent compensation compensation for farmers to offset the minimum price of beet which will be incorporated into the Single Farm Payment.

Controversial plans to allow sugar quotas to be traded across member states have been dropped. One might think that in a single market it would be logical to trade quota across national boundaries, but this idea has never been accepted in the dairy sector. Such an approach would, however, allow a more market based adjustment to change, maximising the chances of an optimal rationalisation of the sector.

Oxfam has criticised the draft plan as 'a harsh, blunt reform package that will hurt the most vulnerable ... some of the poorest countries in the world will be robbed of the sweeeter future that sugar production could give them.'

The reform plan will be the first test of Mariann Fischer Boel's mettle as farm commissioner. She is insisting that she has to go further than Franz Fischler in order to avoid a planned revision of the new regime around 2008. She commented, 'The easiest thing would be to sit on my hands and let the industry die by itself, and that would be a painful death.'

Sunday, May 08, 2005

Poor countries want changes in sugar reform

The LDC Sugar Group which represents the 19 least developed countries with interests in sugar has called for changes in the EU's proposed sugar reforms. They argue that gains under the 'everything but arms' initiative will be outweighed by the planned 37 per cent price cut. They want a twenty per cent cut phased in over ten rather than three years. The LDC Group has tried to appeal to EU agricultural opinion by arguing that under their proposal sugar beet growers would survive in all but two EU countries (Finland and Italy) rather than disappearing in all but nine. However, their plan does not look feasible after the recent WTO appeal panel decision.

The problems faced by LDC sugar exporters are illustrated by the example of Mozambique, a country that is third from bottom on last year's UN human development index. Three out of four people live on less than $2 a day. It has a HIV/AIDS infection rate of 15% and has serious problems with malaria, cholera and tuberculosis. There is virtually no infrastructure with only one decent road running up the edge of the country.

The land is fertile and could develop quickly with more agricultural production and trade. Sugar offers one path out of poverty. The current sugar trade with the EU represents 16% of the country's exports and 34% of its export revenue. The real danger with sugar reform is that the beneficiaries will be emerging countries like Brazil rather than much poorer countries.

The answer lies in the soil

European agriculture is under threat as the quality of soil worsens, especially in eastern states. More than 16 per cent of the EU's land is affected by soil degradation, but in the accession countries more than a third is affected, according to the first Soil Atlas of Europe which was published recently.

The chief threats to soil identified by the atlas are erosion, degradation from the overuse of fertilisers and pesticides, the loss of organic content, contamination from industry, the loss of biodiversity, salinity, the compacting of soil by agricultural vehicles, landslides and flooding. In southern Europe nearly 75 per cent of the soil has an organic matter content (a measure of fertility) so low that is a cause for concern. But even in England and Wales the percentage of soils classed as low in organic matter rose from 35 per cent to 42 per cent between 1980 and 1995 because of changes in farming practice.

The atlas is the first report to analyse all of Europe's soil. The study will form the basis of the Soil Framewirk Directive, expected by the end of the year which is intended to protect Europe's soil from further damage. But the real answer does not lie in the publication of a directive in the Official Journal, but changes in farming practice. Farmers need to be encouraged to use more composted organic material, but their willingness to do so will be affected by considerations of availability and price.

Friday, May 06, 2005

Magyar farm minister gets the sack

Hungarian farm minister Imre Nemeth has been sacked for failing to provide adequate storage for the country's mountain of surplus grain and pay EU subsidies to farmers on time. The dismissal is of more than Hungarian interest as it illustrates some more general issues that arise out of enlargement.

Much of Hungary's grain storage is oudated and leaky and there is not enough of it. As a result it has been forced to rent grain storage facilities in other countries. The storage space problem and other infrastructure issues mean that Hungarian farmers have seen little benefit from the record grain harvest last summer. In addition, raspberries and sour cherries were left to rot as state buying prices were too low to make harvesting worthwhile. Since Hungary joined the EU the country has increasingly been flooded with cheap fruit and vegetables from Poland and dairy products from Slovakia.

Semi-subsistence farming

It is estimated that between 700,0000 and 1.2 million people (seven to ten per cent of the population) depend on farming. Some 80 per cent of these are small-scale farmers. Government estimates suggest that between a third and a half of all agricultural concerns are unviable.

The story of the early years of the CAP was effectively the elimination of the European peasant, always seen as a politically dangerous reservoir of support for reactionary and populist movements (or occasionally for the far left). Now with acession peasants (or subsistence and semi-subsistence farmers) are back in droves. And there will be even more of them when Bulgaria and Romania join the EU. These problems would be exacerbated even further should Croatia and Turkey join.

When the European economy was expanding rapidly in the years of the long post-war boom, it was possible to transfer peasants (or rather their children) into urban areas and manufacturing employment. There are large areas of eastern Europe with a very low density of services, with high unemployment, but where subsistence level agriculture makes it possible to eke out some kind of living. For example, Poland has 1.8 million people classified as farmers, many of them cultivating holdings of an average of little more than one hectare in size.

What all this points to is the importance of a rural development policy that promotes economic restructuring. But it won't be easy to find the money or to remedy deeply rooted structural problems reinforced by a lack of appropriate skills and the absence of an entrepreneurial mindset.

Thursday, May 05, 2005

Breakthrough in Doha Round talks

A breakthrough has been reached in a highly technical yet nevertheless important dispute about EU import tariffs that was holding up progress on the Doha Round. The deal was struck at a 'mini-minsterial' of thirty countries in Paris. It represented a compromise between the EU's views and those of agricultural exporting countries such as Brazil and Australia. Full details are not yet available.

EU trade commissioner Peter Mandelson gave ground on the issue of converting specific tariffs into ad valorem equivalents (expressed as a percentage of a product's value) so as to make it possible to pursue discussions on tariff reductions. The deal involved Mandelson taking risks as it is likely that tariffs will be reduced by a greater amount than the Commission had envisaged. However, market access is proving the most difficult agricultural issue in the Doha Round and something had to be done to break the log jam.

New USTR Robert Portman was seen as having played a key role in brokering the deal. He commented, 'It was a technical calculation, but had so many real-world impacts.'

The issue at stake was how to determine the import price to use for products such as meats and dairy products where the values may be distorted by tariff rate quotas, tariff preferences etc. The EU has the most specific tariffs of any WTO country, followed by Switzerland, the United States and Bulgaria.

Sunday, May 01, 2005

Radical reform of sugar regime more likely

A radical reform of the EU sugar regime is now more likely after the WTO's Appellate Body upheld a ruling against the elaborate subisdy scheme. The complainants,Australia and Brazil, welcomed the decision, their only disappointment being that the EU has been given fifteen months to implement the necessary changes.

The appeal body upheld the original ruling that so-called 'C' sugar exports benefit from an element of cross-subsidy through production quotas and tariff barriers. These work in such a way that EU sugar producers can sell their sugar abroad at below the cost of production, in other words dumping on the world market to the disadvantage of other producers.

The appeal body also confirmed that the EU could not deduct a quantity equivalent to the sugar imported at the full EU price from ACP countries and India under preferential arrangements from the subsidised exports notified to the WTO.

The consequences

The affected exports amount to almost 4 million tonnes a year and would push the EU's volume of subsidised exports well over the 1.273 million tonnes agreed in the Uruguay Round. The EU's notifiable spending on export subsidies would jump to €1.3bn a year as a result of the verdict, compared with the official (and misleading) ceiling of €499m.

The Commission will now have to revise its reform proposals for the sugar regime. A revised reform package is now promised for 22 June. The EU is going to have to find a formula for reform that effectively eliminates the production of C sugar. It is not economic to produce beet sugar in Europe at typical world prices for sugar which are about one third of the current EU support price.

The EU cannot hope to be rescued by a higher world sugar price. There is a structural surplus of production over consumption leading to a declining trend in prices. Given the continuing obesity debate, sugar consumption (especially in processed foods) is likely to fall rather than rise.

In order to conform with the WTO ruling the EU has to cut its support price to the level where it is no longer profitable to produce sugar outside the quota. Account must be taken of the increase in sugar imports that will result from the implementation of the 'Everything But Arms' agreement intended to help least developed countries.

The current draft plans would eventually achieve what is required, but they would not do so within the timetable laid down. To do so, the whole of the 37 per cent cut in price would have to be introduced at once, not in three stages.

The politics

The Comission's plans have already been under attack in the Farm Council as too radical. The European Commission's own calculations suggest that at world prices almost all of the EU sugar beet industry would be wiped out.

It is difficult to see the Council accepting measures that would cut the EU's production by more than a quarter with the biggest hit taken by the most marginal beet sugar producing areas which include politically sensitive parts of France and Germany.

Both beet farmers and the sugar processing industry have always been very effective lobbyists, hence the delay in the implementation of the EBA agreement. Beet refining is an important employer in rural areas. Most beet farmers in the UK are large scale farmers in Eastern England who have considerable political clout and will argue that including beet in their rotation brings agronomic benefits.

Companies take hit

Beet processing companies are already taking a hit. British Sugar was set up by the government as part of its moves to counter the depressionin the 1930s, but is now owned by Associated British Foods. It is reducing its dependence on the sugar beet refining business, but its shares dropped after it admitted that the looming EU reform was likely to have an impact eventually.

The first serious impact on profits is expected in 2007. At present analysts are forecasting a halving of British Sugar's profits over the next five years.

Estonia stuck over sugar for jam row

Estonia is facing a fine of up to 2 per cent of its gross national income over its sugar stockpile. There was a huge surge in sugar buying in the run up to accession as both traders and private households engaged in what the Commission suspects were speculative mass purchases. There was justified anticipation that sugar prices would rise substantially in new member states after accession a year ago as most of them had not had their own sugar subsidy regimes - or certainly not on the lavish scale of that provided by the EU.

Estonia claims that of the 91,466t of extra sugar that suddenly appeared on the Estonian market last year, two-thirds was bought up by private households so that they could indulge their traditional pasttime of making jam and preserves to provide high energy food the year round. Given that Estonia's population is a little over 1.4m, all one can say is that they must be the most enthusiastic jam makers in the world.

A short-term fix

The European Commission decided in mid-April to give Estonia and four other new member states an extra seven months to get rid of their surplus sugar stocks. This can be done by processing it into animal feed or biofuel or by exporting it as C sugar, i.e., without EU export subsidies.