Saturday, June 30, 2007

Are biofuels to blame for agflation?

The UK's consumer prices index showed annual food price inflation of 6 per cent in April, the highest level in almost six years and well ahead of overall inflation of 2.8 per cent. In the US, prices have risen by 6.7 per cent, seasonally adjusted, since the beginning of the year, compared to 2.1 per cent for all of 2006.

There are some proximate factors driving food prices. Florida promises the smallest orange crop in 17 years. Swine fever in China has pushed up local pork prices. Coffee prices have been pushed up by adverse weather affecting production in Vietnam and Brazil, the two largest producers.

Of course, the relationship between food prices and inflation in general has been weakening. In the late 1940s food accounted for 43 per cent of the US consumer price index. By 1975 it was down to a quarter and its weight in the basket is now just 14 per cent.

Biofuels are gradually taking over as the main growth driver of agricultiral demand, Goldman Sachs says that if government policies are adopted in full, global demand for biofuels could increase from 10bn gallons a year to 25bn gallons by 2010. In the US ethanol production accounted last year for 16 per cent of the corn (maize) crop. If farmers are to fill cars as well as stomachs, then there is an argument for structurally higher prices of some agricultural commodities.

Of course, one response in a market system is to increase production, although this is ultimately limited by the availability of suitable land. Indeed, global grain production will rise by 6.2 per cent to a record 1.666bn tonnes in 2007-08, according to the International Grains Council. However, this will not match global consumption forecast at 1.680bn tonnes.

China's Communist rulers are worried and have announced a moratorium on the production of ethanol from corn and other food crops. In China grain security has been at the top of the party's political priority list and a 43 per cent increase in the price of China's staple meat - pork - triggered concern at the highest levels of the party.

The European Commission argues that its 10 per cent 2010 target for biofuels will not put a great strain on food markets. Their analysis suggests that prices for agricultural raw materials in the EU would rise by 3-6 per cent for cerals and 5-18 per cent for the major oilseeds as a result. As the cost of cereals makes up only 1 to 5 per cent of the consumer price of bread, which means that bread prices would increase by less than 1 per cent.

Although concerns have been expressed that planting biofuel crops may contribute to deforestation, biofuels do have clear environmental benefits. Corn-based ethanol gives 35 per cent more energy than it takes to produce. Greenhouse gas emissions per gallon of fuel used are 18 to 29 per cent lower with ethanol than with fossil fuels.

Biofuels are politically popular in the States because they give an income boost for farmers in the electorally marginal Mid West and also seek to address the country's security concerns about energy dependence on the Middle East. President Bush wants the country to produce 35 billion gallons of corn-based ethanol, a goal that will require an additional 129,000 square miles of farmland, an area the size of Kansas and Iowa combined.

What are implications for the CAP? In an ideal world, the promise of improved market returns should mean that farmers, particularly big grain farmers, would have less need of subsidy. Farmers would no doubt argue that they are recovering from a long period of low incomes and that indeed their real incomes has been falling for a century (although in practice this is offset by much larger scale operations that secure economies of scale).

A real concern is that the rush to biofuels will boost food security discourses. These are seen as the best bet by those who want to return to discredited productionist orthodoxies and to make the claim that farming cannot function as a normal commercial activity but should be subsidised.

Saturday, June 23, 2007

New French farm minister is not good news

French farm minister Christine Lagarade only lasted a month in the job before being promoted to finance minister and her successor, Michel Barnier, is not good news if you are a reformist.

He said on Tuesday that his experience as a European Commissioner could help him defend the interests of French farmers within the EU and on a global level. The 56-year old is familiar with the workings of the European Union from his time as commissioner for regional policy and institutional reform from 1999-2004, when he managed the second largest EU budget after agriculture. He was also French foreign minister from 2004 to 2005, but was replaced after French votes rejected the EU constitution in a referendum.

'I will say now what I have always said when I was foreign minister: the common agricultural policy is not an archaic policy. It's modern,' he told RTL radio. So French farmers have nothing to fear, but the rest of us do.

Sarkozy is basically a conservative (he is certainly not a liberal) and he has more important agenda items than agriculture where basically his strategy seems to be not to offend the powerful French farmers lobby.

When I was in Paris, one questioner when I gave my paper suggested that the SFP was deliberately introduced to give a more transparent instrument that would draw public attention to the payments made to big farmers. I do not think the reformist camp was that smart.

In any case, actually getting hold of this information and publishing it is quite difficult as is evident from Jack Thurston's blog at Farm Subsidies Four countries have declined to supply the information and for most member states, including the UK, only partial information is available.

Monday, June 18, 2007

COPA to smarten up its act

Casual explanations of the persistence of the CAP put it down to the strength of the 'farm lobby'. At a national level, there is some truth in this and the positions of member states in the Farm Council often reflect pressure from their domestic farmers' organisations. After all, upsetting them is likely to lead to a lot of trouble and very few plaudits.

However, the European farm level organisation, COPA, has been a shadow of its former self for some time. It was originally set up at the instigation of the Commission and had a close relationship with them through to the 1970s. But since then its influence has faded. This partly reflects a failure to grasp the extent to which the agenda on the CAP, and the acceptable justifications for subsidies, has been changing.

There have been a number of internal reviews of COPA, but the latest one opens up the prospect of change. According to new Secretary-General Pekka Psonen with the EU now having 27 member states, COPA cannot afford to be hostage to any single organisation. Hence, it looks likely that the current unanimity rule will be scrapped and replaced by a system of qualified majority voting.

Will COPA's thinking also be dragged into the 21st century? We shall have to wait and see.

Sunday, June 17, 2007

Sarko's hard line could have a paradoxical end

The hard line being taken by France's new president, Nicolas Sarkozy, on the future of the CAP could have a paradoxical outcome: further re-nationalisation of the policy once seen as the cornerstone of the European Union.

Sarkozy has revived the notion of 'communiy preference', a term dating back to the 1950s which referred to favouring domestically produced goods over imports. The Commission's off the record reaction was 'That would be going back to the CAP of 20 years ago.'

The upcoming health check of the CAP will present some challenges for French policy. Farm Commissioner Mariann Fischer Boel wants aid to farmers to be fully decoupled from production, but France has been one of the most enthusiastic users of options for 'recoupling'. She is also thought to think that intervention purchasing should only be an emergency option.

In the longer run, Budget Commissioner Dalia Grybauskaite is said to favour a radical overhaul of the EU budget after 2013 with a major shift in spending away from farm support towards growth and competitiveness-related spending.

France will become a net contributor to the CAP after 2013. French centre-right MEP Alain Lamassoure, who has been advising Sarkozy on EU affairs, has published proposals which would see greater co-financing of support by national governments. This is not favoured in the Commission as a potential distortion of competition which would undermine the common character of the CAP.

Yet if the EU decides on cuts that are too radical for Sarkozy, or at any rate for domestic French opinion, the solution could be to pay subsidies to French farmers from national funds. Thus, the final outcome could be even more re-nationalisation of the CAP than that which arose from the compromises of the 2003 reform.

I shall be presenting a paper on the CAP in Paris on Thursday and it will be interesting to see what the state of French opinion is.

Monday, June 11, 2007

Water is not just an issue for Australia

Dry irrigation channel near Griffith, New South Wales

The long drought in Australia has now given way to serious floods in New South Wales. Apart from the fact that Australia is a competitor with the EU, what is the relevance for the CAP? With increasing evidence of global warming, the effective use of water is an issue that concerns everyone in the world. Adequate supplies of water for intensive agriculture are an increasing problem in many parts of Southern Europe and water abstraction for water intensive crops is an issue in many parts of southern and eastern England.

A few years ago I visited the town of Griffth, NSW. which is at the heart of an irrigation district in the Murray-Darling basin in an area known as the 'Riverina'. It is sometimes referred to as Australia's version of California's Sacramento Valley. The basin as a whole accounts for some 40 per cent of Australia's agriculture and 85 per cent of its irrigation.

My notes at the time stated, 'We visited an irrigated farm producing rice as well as wheat and canola. In the last year farms have only been permitted 38 per cent of their normal water extraction. The amount of water needed to produce rice has been reduced from around 16 mega litres a hectare to around 11, but this still leaves it as a very water intensive crop.'

Australian rice farmers lead the world in water conservation. Their water use per tonne of output is half the global average. But in the last growing season there was no water for the rice farmers around Griffith.

How it should look: irrigation channels at work

Droughts are nothing new in the Murray Darling because of the periodic El Nino weather pattern. However, irrigators were allowing too much water to be taken out of the Murray-Darling. By 1994 human activity was consuming 77 per cent of the river's average annual flow, even though the actual flow falls far below the average in dry years. The mouth of the river was beginning to silt up. Thanks to a combination of reduced flow and increased run-off from saline soils churned up by agriculture, the water was becoming increasingly salty.

Australia has a fragile ecology that supports a bewildering and amazing biodiversity. It is also the world's biggest exporter of 'virtual water' embedded in farm produce. Just 0.5 per cent of Australian farming is artificially watered, but it produces 23 per cent of agricultural output.

Economists argue that it would make sense for farmers to sell water from their allocations to cities, given that the average price of urban water is $A1000 per megalitre whereas farmers trade water between themselves at $A100 a megalitre in drought years. Politics also comes into it as the farmers generally support the National Party, Prime Minister Howard's junior coalition partner.

The reduction in the availability of Australian produce is one factor producing higher food bills across the world. This year's wine grape harvest has fallen by 30 per cent, the equivalent of 400 million litres. This has eased the wine glut that was hitting Australian producers, but means the end of the cut-throat discounting of the last two years.

And if a country as economically strong and politically robust as Australia has difficulties sorting out its farm water problems, what does that imply for the rest of the world?

Sunday, June 03, 2007

Is there hope in France?

Christine Lagarde

After Nicholas Sarkozy appeared to indicate that it was 'business as usual' in French agricultural policy, the appointment of Christine Lagarde as farm minister gives a ray of hope. Named as the 30th most powerful woman in the world by Forbes in 2006, she was formerly trade minister.

She was formerly chief of a big American law firm. Although she has been careful to say that agriculture would continue to have a 'strategic' role, Ms Lagarde also said that France could continue its position of 'intransigence' for ever.

Perhaps she can use her skills as a synchronised swimming champion to move the debate on CAP forward.