Wednesday, June 29, 2005

No change in subsidy level since mid 1990s

There has been little change in the level of producer support to farmers in developed countries since the mid 1990s, according to the OECD. It is below the level of 37 per cent of farm receipts recorded in the mid 1980s, but the current level of 30 per cent had already been reached in the mid 1990s. Farmers across the OECD countries received €226 billion in subsidies in 2004, a massive amount which could surely be better used.

The OECD notes the shift towards new policy measures that are not directly linked with production. Nevertheless, 'While this shift may well continue over the coming years, production-linked measures still dominate producer support in most countries, encouraging output, distorting trade, and contributing to lower world prices of agricultural commodities.' The OECD also notes, 'Despite the move away from production-linked support, there is only a very modest move to policies targeted to clearly defined objectives and beneficiaries.'

At 34 per cent the level of support in the EU was above the OECD average of 30 per cent. This is an improvement on the 41 per cent level recorded in 1986-8.

Rice (75 per cent), sugar (58 per cent) and milk (38 per cent) remain the most highly supported commodities across the OECD. The largest decreases in both absolute and relative terms have occurred in grains apart from rice, sheepmeat and eggs and milk (where support was measured at 61 per cent in 1986-88).

The OECD emphasises the need for further reform. 'Government intervention continues to be significant, creating important spill-over effects on production, trade and the environment. Although some progress has been made since 1986-88, the current level, composition and spread in support levels across commodities in OECD countries still create distortions that demand further attention from policy makers.' The OECD notes that over 60 per cent of support to producers continues to be provided through policies generating higher producer prices.

OECD governments are increasingly focusing on environmental performance, rural development, animal welfare and food safety and quality issues, what is known in the EU as 'multifunctionality'. However, 'very little support is being channelled to these areas compared to the level linked to production.' Much remains to be done.

Wednesday, June 22, 2005

Sugar reform proposals

The European Commission's proposals on sugar reform announced on 22nd June are no surprise to those who have been following this debate. What is most interesting, given the recent background of debates on the cost of the CAP, is any detailed discussion of the cost implications.

It is admitted that direct aid compensation for farmers will cosr €1,543bn a year and that the restructuring fund is stated to be be €4.225bn over three years. The Commission claims that these costs will be mainly offset by a substantial reduction in export fund expenditure and abolition of the refining aid. Even given that factory closure aids and a top up aid for farmers who no longer have a factory to sell their beet to will be paid for by a levy on quota holders, it seems likely that earlier cost estimates of €1.5bn in the second year of the programme will still broadly apply.

As expected, there will be no trading of quota across national boundaries as the existence of an internal market would imply, although limited 'reallocations' (not trading) will be permitted by national governments. An opportunity to use a market mechanism to achieve an efficient readjustment is thereby lost, but the political cost would probably be too high given that marginal production is going to be eliminated anyway - meaning that production will largely be concentrated in Northern Europe with Poland the only major East European producer.

The main elements of the proposal are:
* A 39 per cent cut in the EU support price over two years from 2006-7
* Compensation for farmers for 60% of the cut price through the Single Farm Payment
* Replacement of intervention buying by a safety net system using private storage
* Payments to encourage factory closures

Farm commissioner Mariann Fischer Boel has said that she is aware of the bitterness of the battle ahead. She is likely to be opposed by an unholy coalition of NGOs like Oxfam worried about the impact on LDCs and member states who stand to lose their sugar industries. They will be backed up by the large scale industrial farmers who grow sugar beet and the oligopolistic sugar companies who refine it.

It would seem that the reform proposals cannot succeed but something has to be done by the start of the 2006-7 marketing year to meet the demands of the WTO's Appellate Body. In a fully liberalised market, the EU would probably not be growing sugar beet at all.

Monday, June 13, 2005

CAP at heart of budget and rebate battle

The CAP is at the heart of the battle over the European budget ('financial perspectives') for 2007-13 and the British rebate. Britain is insisting that its rebate is not negotiable if there are no further changes in the CAP, arguing that the overall structure of the budget is out of line with the needs of Europe in the 21st century.

However, President Chirac and Chancellor Schroeder are adamant that their 2002 deal on CAP pillar 1 subsidies, which would largely protect them until 2013, is not on the table. With France taking not far short of a quarter of CAP subsidies, President Chirac has insisted, 'We cannot accept a reduction of direct aid to French farmers.'

Current presidency country Luxembourg has suggested that spending levels should be set at 1.06 per cent of gross national income, well below the Commission's proposal of 1.24 per cent for commitments but almost halfway between their 1.14 per cent figure for payments and the 1 per cent figure favoured by the UK, Germany and France. What looks vulnerable to any spending cut is not Pillar 1, but the Pillar 2 sums designed to encourage a more vigorous and diverse rural economy. Under the Luxembourg proposals, the sum for rural development would be cut from €88.7bn to €73-75bn over seven years.

While the UK has said that the principle of its rebate is non-negotiable, it has not said the same about capping its level or changing the formula. However, that would almost certainly require some quid pro quo on the CAP. Although Britain is not as totally isolated on CAP reform as it is on the rebate, its support is largely limited to the 'usual suspects', the reform countries of Northern Europe (Denmark, the Netherlands, Sweden) plus Austria.

Expect some fireworks ahead and a largely unchanged CAP.

Sunday, June 05, 2005

Fischer Boel's fears for CAP

Commissioner Mariann Fischer Boel fears that the CAP might start to unravel. The cause of her worries is the current debate over the EU's spending plans for 2007-13. This is going to be more difficult to resolve in the atmosphere of political crisis following the French and Dutch referendums.

Budget Commissioner Dalia Grybauskaité has blamed the CAP for impeding the EU's goal of becoming more competitive. Fischer Boel argues that the CAP share of the budget could be reduced from 45% to 33% by 2018. Cuts of a further 9% could be achieved if Romania and Bulgaria are brought within the limit on farm spending agreed in 2002. Fischer Boel regrets that a proposal by Franz Fischler to place a limit of €300,000 on the amount a single landowner may draw down was rejected by the UK and Germany, but it would be difficult to take on the EU's largest member states.

Fischer Boel has articulated a new vision for the European model of agriculture 'based on a new and younger agriculture focusing on speciality and quality products, linking up with agricultural and commercial schools, using the internet to penetrate the market for direct delivery and welcoming the urban dweller in their thriving rural environment for rest and adventure.' But all this depends on rural development funds and they are the most vulnerable part of the EU farm budget.

Meanwhile traditional conceptions of the CAP die hard. Writing in European Voice Irish MEP Seán Ó Neachtain argues that 'small farm holdings are still an integral part of our culture and our way of life ... I most certainly don't want to see our family farms, the very backbone of our societies, being replaced with industrial holdings that would be more like factories than farms.'

The question is, do such sentimental versions of rurality really help the rural economy in the 21st century? The European Union is a highly urbanised society and farm policy needs to recognise that fact, allowing the rural economy to develop new services that meet the needs of a modern urban population.