Friday, January 23, 2009

Return of the butter mountain

It was the recession of the 1930s that ushered in agricultural protectionism and subsidies, not least in the United States. Now the European Union has reverted to two of its old favourite policy instruments: intervention buying and export subsidies in the dairy sector just when we thought we had seen the last of them. Stocks of butter disappeared completely in 2007.

Faced with a drastic drop in dairy prices, the EU is to buy 30,000 tons of butter at a guaranteed price. Over three times as much skimmed milk powder is to be purchased - 109,000 tons. In addition, export subsidies will be given to skimmed milk powder, butter, butter oil and cheese. These subsidies are, of course, particularly damaging to developing countries where they undermine the viability of local farmers. As Oxfam has pointed out, once the EU starts using them, other countries may follow suit.

Officials argue that, by historical standards, the amount being bought is more of a butter molehill than a mountain. In 1986, the EU bought 1.23 million tons of unwanted butter. However, farm organisations have argued that more intervention may be required. The fall of the rouble has dented one important export market. The price of a ton of skimmed milk powder has roughly halved since the summer of 2007.

As far as other intervention stocks are concerned, the EU has 717,810 tons of cereals in the grain mountain and 41,422 tons of sugar, while the wine lake has 2.3m hectolitres of wine in it.

Let's hope it's not back to the future.

Thursday, January 08, 2009

Defra wants set aside back

The UK rural affairs ministry, Defra, is to press for the reintroduction of compulsory set aside, most likely at a range of 2 to 4 per cent. The motivation is that the department failed to reach all its biodiversity targets in 2008 and Royal Society for the Protection of Birds (RSPB) figures showed that farmland bird numbers were in decline.

A link could be made between set-aside and the Entry Level Stewardship Scheme (ELS). One proposal under consideration is to allow farmers to include set aside in the ELS area of a farm. Farmers who are in the scheme would then effectively receive payments for their set aside.

The NFU has argued for set aside to remain at zero per cent, predictably citing food security grounds. A more subtle argument is that it is a very blunt policy instrument, not just for restraining production, but also for achieving biodiversity targets.

The key point here is the reliance on farmland bird populations as a measure of environmental stress. That certainly reflects the agenda setting power of the RSPB, but it is not necessarily the best measure. Moreover, even if one targets farmland bird population, set aside is a crude way of maintaining their numbers.

Budget pressure on CAP

With the Health Check out of the way, it looks as if the medium-term future of the CAP is going to be strongly influenced by discussions of how the EU budget should be spent. This always raises the awkward question of the opportunity cost of spending large sums of money on subsidising farmers.

One external study has concluded that the CAP could just as well be paid from national budgets as the EU budget in terms of its European added-value. (For the study go here: Budget This study seems to have influenced the viewpoint of EU Budget Commissioner Dalia Grybauskaité. She told Agra Focus that there will be massive poltical pressure for the EU to concentrate its policy spending after 2013 on areas where there is a genuine added-value at EU level, e.g., a common policy on energy or climate change.

The Commissioner described 1st pillar CAP funding as 'generally the largest and most costly EU policy which, under each reform has got more and more expensive and less and less efficient'. She also questioned whether agriculture policy is still a 'common policy'. When the EU was created there were questions of hunger. But that has changed and 'we are now fighting with over production and with price crises for food and agricultural products'.

Another argument for co-funding - which already happens in the new member states - is the casual attitude she has witnessed from some member states to various EU-funded projects - as demonstrated by poor controls and the likely increase in sums received under the 'clearance of accounts' procedure. As soon as national/regional funds are involved, the relevant authorities are more focussed and responsible for an efficient use of public money, she argued.