The usual suspects continue to subsidise

The OECD Agricultural Policy Monitoring and Evaluation Outlook 2024 has just been published and provides a comprehensive analysis and global reference on government support to agriculture across 54 countries, which shows that total support to agriculture averaged USD 842 billion per year during the 2021-23 period.

Support remains concentrated in a few large economies, with China, the United States, India and the European Union representing 37%, 15%, 14% and 13% of the total respectively. Although public support for agriculture has declined since 2021 it remains near historic highs and is still not sufficiently directed at critical innovation, productivity and sustainability goals, according to a new report from the OECD.

In this context, the share of estimated support dedicated to general services such as innovation, biosecurity or infrastructure averaged only 12.6% of total support in 2021-23. While it has been fairly stable since 2020, this share is well below the 16% seen at the beginning of the 21st century. These services are key elements in countries’ efforts towards sustainable productivity growth – the ability to produce more with less while reducing demands on the environment.https://doi.org10.1787/74da57ed-en

Withdrawal of tax break angers German farmers

As Germany faces a budget crisis, German farmers are furious at the withdrawal of the tax exemption for agricultural diesel.   Farmers blockaded large parts of central Berlin with a convoy of tractors yesterday.

The measure is expected to save the state about €900m a year and was apparently agreed over the head of farm minister Cem Ozdemir who has publicly criticised it.  It is estimated that the average farm will have to pay an additional €6,000 a year in tax as a result.

'Red' diesel was retained in the UK after Brexit.

More on this hee: https://unherd.com/thepost/germanys-farmer-protests-spell-trouble-for-olaf-scholz/

The New Zealand experience of removing subsidies

Caroline Saunders, the current president of the Agricultural Economics Society, writes about the experience of removing subsidies in New Zealand in the organisation's latest newsletter.

'New Zealand famously removed all subsidies to agricultural producers as part of its post-1984 reforms. Prior to those reforms, New Zealand (NZ) had a relatively high degree of regulation throughout its economy. With a change in government in 1984 accompanied by an exchange rate crisis and a looming fiscal crisis, NZ undertook widespread liberalisation.

The pace and extent of the reform programme was impressive (Paul Dalziel, New Zealand’s economic reforms: an assessment. Review of Political Economy, 2002). In summary, NZ removed all financial controls, floated its exchange rate, undertook major privatisation of state enterprises, relaxed labour market controls, and removed most import tariffs and regulations.'

'The agriculture subsidies were relatively short lived. Until the mid-1970s, support levels were relatively low. However, the introduction of Supplementary Minimum Payments (SMPs) in 1978 – a form of deficiency payment that favoured the sheep breeding flock – followed swiftly by a raft of other measures, marked a rapid escalation in support levels. These measures included: incentives for land development; concessionary livestock valuation schemes; preferential credit for farm purchase; tax concessions; and fertiliser subsidies. Most were phased out in 1984, with some transitional arrangements persisting until 1986.'

'The main impacts were a drop in sheep production and increases in beef and dairy. Farm incomes for beef and sheep farms fluctuated from NZ$23,000 in 1983 to NZ$18,000 in 1984, NZ$34,000 in 1985 and $15,000 in 1986 before rising again to around $25,000 from 1987 to 1990. The impact of the reforms on fertiliser use was significant, since fertiliser subsidies had been in existence since 1963. Between 1986 and 1991, fertiliser use fell considerably, from around 2 million tonnes per annum, to around 1.2 million tonnes. The real value of farmland doubled from 1972 to 1982, then falling from 1982 to 1988 by 58 per cent.'

'The New Zealand experience of liberalisation of agriculture offers some useful insights. There were clear changes in land prices and production decisions in response to the changes in incentives. However, some caveats also need to be observed, notably that New Zealand had a relatively simple and short-lived support system and the removal of subsidies was accompanied by liberalisation throughout the wider economy. The impact was felt by those who had changed or bought farms during the period with subsidies, and subsequently had debt that was not sustainable after the prices fell. The changes also happened within a generation, which certainly would not be the case in the UK.'

Why farmers have to hedge currency risk

One hundred years ago in 1913 the weather was also warm for the time of year with people claiming that it was too hot to play football. It all ended in a big thunderstorm here in the Midlands. According to a Farmers Weekly poll, the overwhelming majority of farmers still think they have been hit by the weather last winter and the wet and cold spring, the second in a row. I have been growing tomatoes in my greenhouse for over thirty years and this is the worst year I can remember (and, of course, I don't get a SFP!). In these circumstances subsidy payments become more important to farmers to maintain their cash flow.

Along with the uncertainties of the weather, farmers also have to face currency risk. Indeed, some of them follow the forex market as keenly as they keep an eye on the weather. The recent rally by sterling is not good news for farmers as September 30th is the day when their farm subsidies are translated from euros into pounds. (From next year it will be calculated as an average for the month). The pound has gone up by about two per cent since May when they submitted their claims.

A growing number of farmers are resorting to hedging their currency risk. According to Alick Jones, agriculture policy director at Lloyds TSB, about a third of their clients in receipt of the single farm payment hedge their currency risk. However, the Royal Society for the Protection of Birds, which receives £1m in subsidies as a big landowner, doesn't follow this practice.

It was interesting to read in yesterday's Financial Times report on this topic that on one 450-acre livestock farm in Anglesey, the single farm payment of about £30,000 represents about 40 per cent of profits. In the long run, such a dependence on subsidies cannot be healthy, as many farmers themselves recognise, but for now they are an integral part of the business model.

Farmers face early SFP hit

Farmers are likely to face an immediate hit in their 2013 subisdy payments. 'If farmers budget the same as for 2012, they may be in for a nasty surprise,' warned Richard King, head of research at the Andersons Centre.

The proposed EU budget includes a 9 per cent in CAP funding. But one of the oddities of the system is that this year's single farm payment (SFP) will be based on the new CAP budget, but under the current SFP regime. The result could be a cut of about 10 per cent in the single farm payment. This comes at a time when many farmers have been hit by the unseasonable weather. This particularly applies to livestock farmers in higher areas who tend to operate on small margins.

The 10 per cent figure may be a little high, although Richard King insists that it contains a margin for safety. The Commission envisages a cut in single farm payments of marginally under 5 per cent (4.98 per cent) in 2013, equivalent to an overall cut of €1.47bn from the Pillar 1 budget of €44.1bn. This figure will have to be approved by the European Parliament. The cut is the first time that the 'financial discipline' included in the 2003 Fischler reforms has been triggered.

The difficulty is that farmers have become very dependent on subsidies to make a profit. This is the problem with subsidy dependency. Faced with cash flow problems, farmers have been borrowing more. Bank of England agricultural lending figures show farmer borrowing increased to almost £13.5bn for January 2013. This compares to £12.2bn in January 2012 and £11.7bn in February 2011 (albeit there is an inflation component in those figures).

One recommendation is that farmers should consider hedging at least part of their single farm payment to protect against exchange rate fluctuations. This could make thousands of pounds difference, but it is only an option for larger scale farmers.

Other farmers need to consider whether they want to stay in low margin businesses like dairying. There is a risk that if farmers sell their cows and machinery they may then be tempted to live on the assets while the capital value of the farm (if owned) deteriorates. They need an alternative business plan in place.

Fans of The Archers will note the controversy caused by Tom Archer's argument that Bridge Farm should stop milking its own cows and buy in the milk it needs on the market. Although the scriptwriters had the character put it tactlessly, he is right: milking cows is time intensive and the real money is to be made adding value to milk by making niche products such as organic ice cream and yoghurt.

The real difficulty for farmers is that they do not face a level playing field given the buying power of supermarkets. That is not going to change any time soon. But farmers need to recognise that subsidies are going to fall more in real terms than they have in the past.

OECD calls for farm subsidies to go

The OECD is arguing that currently relatively high farm prices provide a window of opportunity to scrap farm subsidies: OECD

If only it were so, but the underlying politics does not permit it. Farmers will point out that input prices have also risen and mobilise food security arguments to justify the need for subsidies. Veteran Farmers Weekly columnist David Richardson is even waving the threat of food rationing in the latest attempt to alarm politicians and consumers.

In fact the rise in commodity prices has reduced the share of farm incomes that comes from subsidies. Across the OECD countries this fell from 22 per cent in 2009 to 8 per cent in 2010. It is consistent with a long-term declining trend.

This is not because subsidies have been cut in response to the fiscal crisis, but because of a reduction in countercyclical payments. Even so the 34 OECD member countries spent $277bn last year subsidising their farmers. Subsidies account for about 9 per cent of US farmers' income, but the figure is 28 per cent in the EU.

China has jumped on the subsidies bandwagon. The amount paid out last year went up to a record $147bn, an increase of 40 per cent on the preceding year. This pushed the share of Chinese farm income drawn from subsidies to 17 per cent, near the OECD average of 18 per cent. Direct payments to grain farmers in China have been consistently increasing since their introduction in 2004.

Britain and Poland have issued a joint statement calling for CAP reform and in particular less emphasis on Pillar 1. Poland joining the reform camp is a step forward, although it is interesting that one of the stipulations is a convergence of direct payments across the EU. See more here: Poland

Farm incomes up

Farm incomes are up in the EU, but there is considerable variation across member states. EU farm incomes jumped by almost 13% last year, thanks to higher crop and milk prices, but the UK was among just seven member states to see a drop.

The biggest increases in earnings are attributed to Denmark (an astonishing 57% higher), Estonia (+46%), the Netherlands (+39%) and France (+34%). The UK, however, recorded income 6% lower than a year earlier. It should also be noted that key input prices such as fuel and fertilisers have been on an upward trend.

In the UK's case, exchange rates have been a significant factor. The 2010 statistics reflect a decline in the exchange rate at which payments through EU direct aid schemes were converted from euros to sterling. In the UK, this meant a fall in the value of the Single Payment Scheme and other payments of some 12 per cent.

Interestingly, the statistics reveal that a mere 15% of EU farmers claim 85% of CAP subsidies.

The same figures also show that farmers in general are still relying heavily on CAP subsidies – Pillar One and Pillar Two funds made up 42% of farm incomes last year, up from 39% in 2008. This shows a worrying dependence on subsidies and illustrates why it is so difficult to dismantle them or even reduce them substantially.

Farm subsidies face cut in US

There's nothing like a budget crisis for focussing the mind and it looks as if farm subsidies in the US may be facing cutbacks, even the politically well entrenched cotton subsidy: Subsidies

Quite how those pressures will play out in the tortuous EU budget process is another matter. In the US there is a direct trade off with spending on health and education. In the EU these are domestic budgetary responsibilities.

France seems confident that the existing budget can be defended, but there may well be some trimming.

Justifying farm subsidies

There's been an interesting debate in the pages of the New York Times Book Review about the work of Freidrich Hayek.

Peter Dreier, a political science professor in Los Angeles, wrote in to justify some forms of government intervention. However, even he had a few problems when he came to farm subsidies.

He argues that 'during the Depression, federal agricultural subsidies saved family farms and rural jobs.' Anyone taking a social market position would accept that you have to take exceptional measures in a recession. The problem is that temporary crisis subsidies become permanent and create a set of clients who are prepared to use time and resources to lobby in their defence.

Drier admits, 'Today, a vast majority of farm subsidies go to large agribusiness conglomerates that don't need them, rather than to small family farmers.' It's an interesting question whether marginal businesses should receive some general subsidy as distinct from rewards for positive externalities such as environmental goods.

He goes on to say, 'food stamps, an indirect subsidy to farmers, clearly improve the general welfare.' However, that is the trick. By wrapping up subsidies to the poor in the farm budget, the agricultural lobby is able to win the support of Democratic urban congress members who otherwise would have no interest in maintaining farm subsidies.

It looks like there is an appetite in the House of Representatives to cut them against the background of an out-of-control federal budget deficit but it will be interesting to see what the eventual outcome is.

By the way, if you haven't seen it already, I would recommend the 'Keynes and Hayek rap': Rap . There is also a Round 2 in which JMK and 'Freddie' go toe-to-toe on the current recession.

Commission insists on transparency

The Commission has reacted to a court judgement on publishing details on farm subsidies by insisting on a commitment to transparency: Subsidies

While the judgement means that data cannot be published on 'natural persons' (individual farmers) the Commission's view is that it could and should be published about 'legal persons' (companies).

Given that many large farm businesses are constituted as companies, this could mean that taxpayers would still have access to data about the really big payouts. However, much depends on the follow up action taken by member states.

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.

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

Disclosure of subsidies may end

Transparency in the CAP may be reduced with a ruling which suggests that EU rules which require member states to publish details of payments to individual farmers may be invalid. An opinion by an ECJ Advocate General is often indicative of the view that the Court itself may take. German farmers had challenged the rules on the grounds that they were an invasion of their privacy.

Advocate General Elinor Sharpston said that the rules were disproportionate and that there were discrepancies in the reasons the European Commission and the European Council had given for needing the legislation. The assumption that farmers consented to disclosure when they applied for subsidies was also open to question on the grounds of whether it was explicit enough.

Reform advocates have used the information to draw attention to the very large sums of money paid under the CAP to big landowners or to food processing companies making use of export subsdies. Farmers' organisations argued that members of the public often confused Single Farm Payments with profits.

How many members of the public have been interested is open to question. The information is not that readily digestible and is not equally available for all member states (in the UK it can be found on the Defra web site). However, when I have looked at information relating to farms in areas I am familiar with (admittedly not a representative sample) I have been surprised by how relatively low the payments have been. They would be higher, however, in areas like East Anglia and Lincolnshire.

Depending on the nature of the final ECJ ruling, the Commission may have to redraft the rules rather than scrap them altogether.

Ag econ folks give it large to SFP

The intention of the European Commission to retain the SFP as the centre piece of the CAP after 2013 is a fundamental error according to leading agricultural economists. In a paper by David Harvey and colleagues to the Agricultural Economics Society conference in Edinburgh, it was argued that direct farm payments should be phased out.

The very idea of general direct payments was said to be unjustifiable. Payments should be reoriented from payments that are still historically linked to production-based payments and towards the guarantee of food supplies, rural economic development and protection of the environment.

The ag ecnomists argue that the overall agricultural policy problem for the EU is the preoccupation with farm incomes which dates back to the formation of the CAP in the 1950s. The bulk of an expanding budget is still spent on that objective. Despite this expenditure, average farm incomes remain below the national average income in almost all member states (which, of course, could be seized on as an argument for not making things worse by removing farm support). The economists argue that whatever governments do, they are not going to substantially improve the incomes of the less efficient and marginal farm holders.

The economists note that these payments were originally meant to be transitional. Of course, following Mancur Olson, the politics of subsidies which have concentrated effects but diffuse costs means that they are often converted from temporary to permanent payments.

Harvey revives the idea of a bond scheme to buy out these payments as first suggested by Professor John Marsh more than twenty years ago and subsequently developed by Alan Swinbank and his colleagues. Uncertainty for farmers would be reduced and they would have time to adjust to liberalised markets.

I have always found such a scheme attractive in principle, but the Commission view is that it is not compatible with cross-compliance.

How can direct payments be justified after 2013?

This is the question that former OECD trade and agriculture supremo Stefan Tangermann poses in a recent issue of Agra Europe. In effect the answer that the agricultural economist gives is that they can't be, although he is too canny to say that in so many words. But he takes each argument for the SFP in turn and demolishes it.

He points out that direct payments make up nearly three-quarters of EU expenditure on the CAP, equivalent to about one third of the Union's total budget. The argument that they are compensation for earlier reforms can no longer be used to justify their continuation.

What about the view that farm incomes lag behind incomes in other parts of society, which in fact is not necessarily the case? Then payments would have to be in line with the criteria for other income support policies. It would have to be means tested so that better off farm families received less. Moreover, payment would have to be higher in member states where the gap was greater which is not compatible with the idea of a level playing field in a single market.

What about the food security argument, the desire to safeguard a viable agriculture in Europe? Tangermann points out that empirical studies show that farm support is largely capitalised in land values. Where land is rented, most of the direct payments flow to landlords. If support was eliminated, 'Land rents will adjust and farming continues.' This perhaps reveals an economist's faith in automatic adjustment in functioning markets. In fact adjustment would probably only occur after a time lag and then not fully. That delay could be cricial for some farmers.

What about enhancing competitiveness? Tangermann points out that competitiveness depends on productivity, know-how, product quality and the like. Education, training, extension services and research and development are the policies that help, not per-hectare payments.

What about the argument that environmental and other standards are more demanding in Europe than other parts of the world? Tangermann notes, 'Research has shown that they differ very much from sector to sector within the farming industry, but also from farm to farm. Overall, though, any such extra costs are relatively small, certainly much smaller than the level of payments currently granted to EU farmers.'

What about cross-compliance? Most of the requirements under cross-compliance would have to be respected anyway: 'Justifying payments on these grounds is akin to granting payments to all car drivers, which are then claimed back from drivers exceeding speed limits.'

So Tangermann concludes that it is doubtful whether any credible justification can be developed for direct payments. But when he gets on to political ground is touch is less sure. Having a good case matters, but there is also a lot of raw power politics surrounding agriculture with many member states willing to spend political capital to defend their farmers. Tangermann says that 'Europe's taxpayers are keen to know why they are expected to finance such payments', but I see little evidence of such interest. Hence, it is possible for agricultural lobbies to mount 'business as usual' arguments with little effective challenge.

Continued need for market support

A paper circulated by the Spanish presidency has argued for keeping a strong arsenal of market support measures within the CAP. The paper includes a series of graphs showing the volatility of EU and world food commodity prices, even before the 2007/2008 price spikes.

It is argued that a strong budget is needed to support such measures. Among those specifically mentioned are intervention buying, private storage aids and export refunds. It is evident that the perceived food security crisis is breathing new life into policy instruments that seemed to be on the way to extinction, encouraging those who hope for a 'business as usual' model for the future of the CAP.

The paper does mention earnings and incomes insurance, but does not back the idea pending assessments of the effectiveness of such a tool and its WTO compatibility.

CAP support levels reach new high

CAP subsidies as reported to the WTO reached a new high of over €90 billion for the decade in the 2006/7 marketing year, but conveniently most of them have been parked in the allegedly non trade distorting green box, something that has provoked disquiet in Geneva: Subsidies

New ideas from Scotland

The interim report of the Scottish Government's Pack Inquiry has called for direct support to Scottish farmers to continue beyond 2013. You can find out more here:
Pack

No surprises there, but the report also proposes a new top-up find which would be financed by money taken out of the direct payment budget. This could be used to support measures such as fuel efficiency, renewable energy and animal health schemes (an area where Scotland has often been ahead of the curve).

Former auctioneer Brian Pack commented, 'Much more consultation and research is needed, but the idea is that a top-up fund would be used to back outcome and transformational change. It could be the new contract between producers and Scottish society and give the Scottish public the sort of efficient and sustainable agriculture they want to see.'

This is an interesting and innovative idea which deserves further consideration.

It all kicks off in Greece

Greece's financial troubles may be hitting the euro, but this has not deterred Greek farmers who have been in a ten day confrontation with their government as it desperately seeks to stabilise the budget. The farmers have marched through central Athens demanding an extra €1 billion in subsidies.

This is cloud cuckoo land politics but, quite frankly, anything is possible in Greece which has shamelessly misled the EU about the scale of its budget deficit. Greece is the worst kind of party state reminiscent of Italy in the past where politics is about granting favours and can verge very closely to behaviour that is corrupt.

One of the populist slogans is 'Give money to farmers not bankers', referring to the government's attempts to raise funds abroad to pay down its debt. The realities of the situation have been well summarised by Yannos Papantoniou, the former finance minister who took Greece into the euro: 'Deep structural refoms are needed to engineer first growth, then productivity increases. Since the state sector is inadequate and inefficient, the country needs to embrace privatisation and market liberalisation to get growth going again.'

They could start with the agricultural sector which, if it was smaller, might be able to cause less disruption. Farmers have been blocking 20 highway junctions across the country, including a blockade of the country's border with Bulgaria which has upset the fellow EU member state. One might think that, in an internal market, this came within the remit of the EU itself.

But I'm afraid it's old style farm politics in Greece and we shall see a lot of that as the EU and its member states include agriculture in the round of budget cuts.

The health check is over

The health check is now well and truly over so the CAP Health Check blog has been replaced by a new and more attractively designed site at Subsidies

They also have a film on You Tube about the work of their site: You Tube . This is interesting and well-made.

I suppose my view would be that if you are going to have subsidies, one has to be careful about cutting them off from large farmers who are arguably more efficient and certainly more internationally competitive. Of course, 'efficiency' is a contested concept and does not take account of negative environmental externalities, but what that implies is a proper Pillar 2 in the CAP and a new Pillar 3 to deal with climate change (or at least a substantial climate change dimension to Pillar 2).