Monday, January 31, 2011

Financial speculation and volatile prices

There has been increasing discussion recently about the link between financial markets such as those dealing with futures and derivatives and volatlity in farm prices. The subject has been highly contested and there is no consensus view.

This viewed is shared in a leaked draft of a Commission communication which concludes that there is no conclusive evidence on the causality between activity in derivatives markets increased volatility & price increases in the underlying physical markets.

The draft version suggests unsurprisingly that agricultural commodity prices are expected to stay higher than their historical averages reversing their long-term downward trend, with producer margins increasingly squeezed due to higher costs.

Similarly price volatility is expected to remain high, although 'uncertainties with respect to its causes and duration persist'. Referring to the ‘CAP Towards 2020’, it notes that food security has been identified as one of the main drivers for future reform in EU policy, underlining that a 'strong agricultural sector is vital for the highly competitive food industry to remain an important part of the EU economy and trade and a major contributor to international markets'.

Commenting yesterday on a decision to defer its publication, the Commission spokesperson outlined that there is 'no doubt about the links between the physical & financial markets', but that there is a 'need for more time to look at the specifics at play between the financial markets and markets that are not closely regulated' such as Over-the-Counter (OTC) derivatives. The Commission now intends to 'refine the analysis' on the reasons why markets fluctuate and seek greater clarity on the interaction between speculation and markets.

Friday, January 28, 2011

It's all in the green box

The EU has done a good job of stuffing its CAP subsidies into the green box category which is supposedly free of distortions to international trade, this latest report from ICTSD shows: Green Box

Production-linked subsidies hit a new 'low' of €12.3bn, whereas green box subsidies such as the Single Farm Payment amounted to a new high of €62.6bn. That makes a total of €74.9bn and it is worth reflecting on the opportunity cost of that amount of spending.

As one comment on the report points out, what really distorts global trade are the EU's high tariff barriers, particularly in relation to so-called 'sensitive' products. Should the Doha Round resume, this is an area in which agreement will be needed.

Of course, there are questions about whether subsidies placed in the green box are really free of distortions to international trade and this could be tested in the quasi-judicial WTO dispute settlement mechanism at some point in the future.

Wednesday, January 26, 2011

The subsidies dilemma

A farmer writing to Farmers Weekly says of Caroline Spelman's support for phasing out the Single Farm Payment, 'Surely she must realise the subsidy keeps most farmers in business?'

The correctness of this view in the short term, for livestock farmers at any rate, was confirmed by HSBC's head of agriculture Allan Wilkinson who said that livestock and dairy enterprises are likely to be even more reliant on subsidy payments to make a profit this year.

He told Farmers Weekly that while arable producers will benefit from the dramatic upturn in commodity markets, relatively static meat and milk prices, combined with big increases in feed costs, will put margins for beef, sheep and dairy producers under significant pressure.

Part of the answer is, of course, not subsidies but the response of the individual farm business to admittedly difficult market conditions. Mr Wilkinson acknowledged that output and costs varied significantly and that top-performing producers and those who had managed to secure higher end prices or cheaper inputs would fare better.

He commented, 'It's clear that volatility is here to stay and the successful busineses will be those that devote more effort to marketing strategies, in conjunction with a continued focus on technical efficiency and lowering production costs.' In other words, farmers have to get smarter.

Subsidies may not help them to get smarter. With Simon Marsh of Harper Adams University College, Farmers Weekly is following the month-by-month progress of an upland suckler herd that's consistently performing in the top 1 per cent of all costed herds. Mr Marsh commented, 'For too long, the UK beef industry has relied on support payments and it has stifled incentive to strive for efficient production.'

I was recently talking to a journalist from an esteemed weekly who has written on the CAP. He commented that when prices were low, the French (as the main defenders of the CAP) said that subsidies were needed to boost farm incomes. When prices were high or volatile, they were needed to ensure food security. He once asked a French minister if there were then any conceivable market circumstances in which an argument could not be produced in favour of subsidies.

We do not start with a blank sheet of paper and a sudden withdrawal of subsidies would seriously disrupt the market. But we should be starting down that road. Many farmers would be happier getting their return from their market without all the transaction costs of filling in forms to claim subsidies and the hazard that you may be denied part or all of your entitlement because of an inadvertent error.

What is more the UK is facing up to £1bn of fines from the EU in large part because of incompetent handling of Single Farm Payments (some £664m appears to relate to Defra). This was described in 2009 by the Commons Public Accounts Committee as a 'singular example of comprehensively poor administration on a grand scale.' Britain has now joined Italy and Greece among the worse offenders on farm funding

Monday, January 24, 2011

Global farming food and future report out

An important report led by the Governnment's Chief Scientific Adviser, Sir John Beddington, setting out the challenges facing farming and food supply on a global basis is now available: Farming Future You can hear a Radio 4 discussion on the topic here: Beddington

This should provide a basis for a serious discussion about how agricultural productivity can be raised whilst coping with the challenge of climate change and other environmental considerations such as the maintenance of biodiversity.

Land is a finite resource, indeed its availability is diminishing because of urbanisation and the effects of climate change. Farming and food is very dependent on oil at various stages of the food chain, while the availability of water is an increasing constraint.

In the longer run support for the farming industry should not come through blanket subsidies but by, for example, ensuring that there is an adequate research structure that is oriented towards devising practical solutions towards the resolution of pressing problems.

Sunday, January 23, 2011

Buoyant market for SFP entitlements

The market for SFP entitlements appears to be buoyant. Buyers far outnumber sellers which naturally tends to push up prices. George Paton of WebbPaton told Farmers Weekly that they had a requirement for 2400ha on their waiting list.

The confiscation of entitlements under tighter usage rules has had the effect of reducing the number of 'spare' entitlements. There are also more buyers about, some of them finally getting round to buying entitlements for land that missed out on the original allocation in 2005.

English flat-rate entitlements of €241/ha are currently worth around £205/ha, which is close to the level they can be expected to pay out in 2011, assuming exchange rates remain similar to current levels (when the pound fell against the euro it pushed up the value of payments received by farmers in sterling.) Entitlements for Severely Disadvantaged Areas and Moorland Areas are once again in particularly short supply and are fetching up to twice their annual face value.

Ideally one would not pay general subsidies of this kind to farmers at all. However, if one does have them, there is an argument for having a secondary market to re-allocate them more efficiently to those who think they need them most.

In a sense those who buy and sell in this market are taking a bet on the sterling/euro exchange rate. Of course, this not only affects the sterling value of the SFP, but also key input prices which have been rising substantially recently. 'Red' diesel for use on farms is taxed at a lower rate than diesel bought for normal domestic or business use, but its price has been pushed up substantially recently by rising world oil prices.

Friday, January 21, 2011

Ciolos lays it on the line

Dacian Ciolos has emerged as a more authoritative and decisive farm commissioner than many expected. Whether his line is the correct one is another matter. But the grumpy old man of British farming, Farmers Weekly correspondent David Richardson writes of his appearance at the Oxford Farming Conference, 'he had comprehensively mastered his brief and, when questioned, actually answered as fully and frankly as any politician I have known.'

The content of his message is perhaps less welcome. It's clear that he sees his job as being to change the CAP but also to defend its essential elements. I do, however, welcome the news that research and development may be included in pillar two. The food chain needs more publicy funded, applied research which can help to tackle pressing policy problems and on farm challenges. This has been cut back drastically over the years.

It is evident that the Commissioner thinks that part of the price of defending the CAP is capping subsidies to larger farmers. He is clearly influenced by his Romanian experience where it has been possible for farmers with very large farms (presumably in some cases former collective farms) to use the income from subsidies to start other businesses. This is evidently resented in Romania where there are also many small (and by European standards) relatively backward farms.

Ciolos argues that in some parts of Europe the choice is small farms or no agricultural activity at all. It may be that in some of these areas agricultural activity is not really viable and the land should be farmed as an ecological asset to maximise environmental benefits.

Ciolos argues that it's very difficult to explain how giving €2m to one individual or company is 'income support'. If the CAP really is income support, it's an inefficient way of delivering it.

What is continually overlooked with the CAP is the international competitiveness dimension which is supposed to form part of the policy. Large-scale farmers tend to farm to a high standard (including animal welfare standards), are highly competitive and also are often substantially involved in agri-environmental work.

If you cut off aid to them, you are penalising them for being more efficient. In any case there would be all sorts of legal problems over the definition of a farm business.

Ciolos evidently sees the CAP as more justifiable as a mechanism for the transfer of funds from taxpayers and consumers to marginal farmers. It is actually not an efficient way of helping them or the environment, it doesn't do much for food security (given that their output is low) and it doesn't help the EU food industry to become more competitive.

Friday, January 14, 2011

Spelman hits raw nerve with Ciolos

The speech by Defra secretary of state Caroline Spelman has clearly hit a raw nerve with farm commissioner Dacian Ciolos: Ciolos

In essence what Ciolos is saying is that this was a speech made for domestic consumption, but it will cut no ice in Europe. Depressingly, he is probably right, but the secretary of state was still right to set out her stall. She may be able to have some impact on the details of any deal, particularly when the budget dimension is brought into play.

Once again food shortages and volatile prices are in the news. If nothing else, this is a case for doing something about the high tariff barriers which surround the EU in the food area, particularly on so-called 'sensitive' products. If developing countries could get more access to developed markets, they would be incentivised to move towards more commercial agricultures which would feed more people both at home and abroad.

There are, of course, a lot of complex issues here and there are undoubtedly some areas of the world where improving semi-subsistence agriculture is the best way forward. But no one is going to become genuinely prosperous that way.

Friday, January 07, 2011

The big politics behind the CAP deal

Why was Dave Cameron willing to do a deal with France and Germany on CAP subsidies given that he is genuinely an Eurosceptic? This article (which was easy to miss as it came out on Boxing Day) explains the big politics behind the deal and opens with some amusing remarks about CAP subsidies: CAP deal

Wednesday, January 05, 2011

Call for fundamental CAP reform

In a major speech at the Oxford conference, secretary of state Caroline Spelman has called for a more ambitious approach to CAP reform and a fundamental change in the nature of the CAP: Spelman

She's talking the talk like former secretaries of state, but walking the walk is always more difficult. Only in very special circumstances has it been possible to build anything like a winning coalition for reform. Current thinking reinforces the trend towards protectionism she rightly criticises.