Wednesday, March 29, 2006

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.

Monday, March 27, 2006

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.'

Sunday, March 19, 2006


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.

Friday, March 17, 2006

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.

Monday, March 13, 2006

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.