Glimmer of hope over Doha

International trade negotiations have been the most effective driver of CAP reform for over fiften years. I haven't commented on progress in the Doha Round for some time because prospects have looked so bleak since the collapse of the G-4 talks at Potsdam. But there does seem to be a glimmer of hope.

The Potsdam talks were ominously held at the Cecilienhof complex where the 1945 conference took place that carved up Europe after the end of the Second World War (I visited there when it was still in East Germany). This time it wasn't Stalin, Truman and Churchille/Attlee round the table, but the US, EU, India and Brazil: how the world has changed.

The talks broke up acrimoniously early after Brazilian Trade Minister Celso Amorin and his Indian counterpart Lamal Nath accused the US and EU of failing to live up to the commitment of a 'development round'. For their part the EU and US accused Brazil of inflexibility and even backtracking, particularly on tariffs for industrial goods.

On agriculture there were some signs of flexibility on the US side particularly in relation to trade distorting domestic support. There were also hints that the EU might be prepared to off bigger cuts for those products with tariffs over 90 per cent, although the EU insists that the discussion was more about the combination of tariff cuts and protection for so-called sensitive products.

Farm negotiations chair Crawford Falconer has tabled a draft document, but what it leaves open is the question of 'special product' provisions which permit developing countries to shield particular commodities from cuts in tariff agreements. They are a particular bugbear for the US who say they undercut liberalisation.

An agreement is not going to come anytime soon. Election pressures are increasing in the US and the next president may be elected on a protectionist platform, Hilary Clinton having seemingly abandoned her husband's commitment to free trade.

The dairy paradox

British dairy farmers are leaving the industry in large numbers, but world milk and milk product prices are heading upwards fast. How can one explain this paradox? The simple answer is, of course, that the key UK liquid milk market is largely insulated from world market factors.

Wholesale milk has doubled in price on world markets over the last year. One factor is the surging demand for milk products in China and the Middle East as diets change in respond to surging incomes. Drought problems in Australia which crippled the country's dairy output has raised the wholesale price of skimmed milk powder by 60 per cent over six months. This is an input widely used by the food processing industty and over year it has increased in price from $2,000 per tonne to $4,800.

The latest Milk Development Council survey shows that 16 per cent of dairy producers, some 3,000 in total, intend to quit. Of course, some of those may have been departures anyway given the lack of successors. It is also worth noting that they tend to be smaller producers, as the loss of 16 per cent of producers is assumed to produce a 7 per cent fall in output (although this in part depends how far larger producers increase output).

Campaigners for dairy farmers often state that many of them are not making a profit. These statements need to be treated with a little caution as generally accounts include family labour as a cost before profits are calculated. Nevertheless, the sector has been under pressure.

The decision by Tesco to pay 22p a litre for retail milk sets something of an industry standard and is a lifeline for producers. Views differ about whether it was the result of the Competition Commission's increasingly vigorous interest in Tesco or the outcome of campaigning by dairy farmers through the NFU and other bodies. However, milk used for other products like cheese and butter generally yields a poorer return.

Some of this is feeding through into consumer prices. The home delivered pint at 48p per litre is likely to go up by a penny at most, but within the past year, the supermarket price of a pint of double cream has gone up from 91p to £1.12p, an increase of almost a quarter. Processed foods and cheese are likely to see a substantial impact, while Domino's Pizza is forecasting a 30 per cent rise in the cost of its products due to cheese price increases. Chocolate manufacturers have also taken a hit, although that has often been felt more in terms of a profits squeeze than by consumers.

Export refunds for dairy products have now been phased out which is a significant gain given they were at a level of €3.01bn in 1988 and even amounted to €725m last year. They could be reinstated if the market falls, but it is currently so buoyant that the Commission is talking of reducing the meetings of the Dairy Management Committee from twice to once a month. If export refunds remain at zero, EU spending in the dairy sector would be lower than revenue from superlevy, making the sector self-financing.

The Commission is determined to phase out dairy quotas by 2015, although discussion of how to achieve a 'soft landing' continues. There have been expressions of concern from economically marginal but politically influential dairy areas like Bavaria. One solution could be to use a 'national envelope' device to provide assistance.

The EU has historically had a structural surplus of milk, while Britain has not been self-sufficient because of its historical reliance on imported dairy products from the Commonwealth. A more market oriented system should benefit larger scale UK producers, who are among the most efficient in Europe, but pressure on smaller, more marginal and more peripheral farms would continue.

Horse paddocks get SFP

In the long run it is going to be difficult to justify a Single Farm Payment (SFP) model that is based on historical receipts. This model originated in the generous compensation given to cereal farmers for cuts in intervention payments in the 1992 MacSharry reforms. There will be a shift to a regional model with a flat rate payment per hectare in each region. This is already under way in England, Finland and Germany and all the new member states have a flat rate payment system.

However, those member states that have introduced a regional model have seen applications for CAP support rocket, e.g., on horse paddocks which are a popular use of land near any centre of population. These claims are frequently for small amounts, e.g., €50 - €100, but the high number of applications - 40,000 in England and 20,000 in Denmark - imposes considerable transaction costs.

It is likely that the Health Check will look at introducing some form of lower threshold for SFP funding, such as a minimum amount or raising the current 0.3 ha minimum area requirement for applications.

Corridor politics secure fruit and veg deal

The fruit and vegetable reform agreement is another step on the road to a more market oriented CAP. Yet in some ways it is more significant in terms of how it was secured and what it reveals about decision-making in an EU with 27 member states.

Despite fears of a marthon session, agreement was reached by 5 p.m. in the afternoon. This was done by conversations in the corridor rather than in plenary session of the Council. This reflects the way in which deals are increasingly being reached in the Special Committee on Agriculture or in the margins of the Council itself - over lunch or in the corridor. This has always happened to some extent, but it is more necessary in a much enlarged EU.

The existing system of processing aids for tomatoes (€329m), citrus fruit (€241m) and peaches/pears/prunes/figs (€76m) based on production and an area based scheme for dried grapes (€115m) will cease this year. The funds received by each member state will be added to the national envelope for the SFP. However, a 'coupled' aid for tomatoes can be retained by member states for four years.

Various side payments had to be made to secure the deal. Spain and Italy will get a one-off national aid of €15m in 2007/8 to help the tomato processing sector. The reference period for Greece was adjusted because of a poor peach crop in 2004, effectively giving Greece an extra €3.1m in its envelope. There will be some transitional direct payments for soft fruit on new member states, although in the case of Latvia this amounts to just €92,000. But by such adjustments deals are made.

Productionists unite under food security banner

A number of producer interests would like to revive food security as a major driver of agricultural policy. Organisations like the Commercial Farmers Group (CFG) in the UK, a small grouping of leading producers, argue that new threats are present in the form of population growth, pandemic diseases, climate change, terrorist actions and increased demand for renewable fuels. They want to change the balance between the environmental and food safety concerns that have been driving agricultural policy in recent years and return to more traditional productionist priorities.

Hence, the NFU in England argues that ‘Food security concerns … need to play a role in the design of any future agricultural policy. Similarly, the Country Land and Business Association (CLA) argue ‘that security of food supplies should be a strategic priority.' The CLA’s chief economist, Alan Buckwell, has been trailing the idea of a European Food and Environment Security Policy which would seek the ‘socially optimal’ production of high quality food, energy, biodiversity and landscape. This is undoubtedly an ingenious way of placing old ideas in a new wrapper.

The CFG takes the view that ‘80% of the food consumed nationally should be from the UK’. This revival of old style economic planning targets is too much for the NFU who stressed, in line with government thinking, ‘that food security was not the same as self-sufficiency and the union did not want to see the government set strict targets on food production or intervene in the market.’

What the NFU envisages is an ‘early warning system’ in which indicators such as the UK’s share of EU production in different sectors would be used. When that fell by a given amount, there would be an investigation by a joint industry/government panel. This would then presumably undertake measures to ‘safeguard the productive capacity of UK farming', although how this would be compatible with EU state aids policy or WTO rules remains unexplained.

Farmers' Weekly columist David Richardson, an unabashed defender of productionist values, has argued that the early warning committee should be set up as an equivalent of the Bank of England Monetary Committee. Of course, one difference is that the experts on the Bank of England do not have a substantial direct personal interest in the decisions made as farmers and their allies would.

Productionist lobbyists have tried to borrow discourses about energy security, claiming that if government can pay attention to energy security it can also move food security up the political agenda. However, oil and gas supplies are more reliant on a small number of potentially unstable countries than food supplies. This argument also overlooks the increasing global integration of food production. Nevertheless, the food security discourse is a powerful one and there are those who consider that it could be used as a basis for a productionist turn in policy.

Boom in Borage?

Walking the fields near my home, I noticed a new blue starflower crop that I was not familiar with. Indeed, the crop has suddenly become one of choice throughout this part of Warwickshire.

A little research established that it was Borage, a high value, speciality oil crop. Similar to Evening Primrose, Borage is recognised as a key source of gamme-linoclenic acid (GLA) and is used, when marketed as Starflower Oil, as a health food supplement or in skin care creams. GLA is known to have anti-inflammatory properties, without causing side-effevts often encountered by other inflammatory drugs.

Borage was first grown as a field crop in the UK in 1983, mainly in East Anglia. During the 1990s the crop area increased significantly. It has agronomy advantages as it is a good break crop in arable rotations. It's a low input crop with minimal environmental impact, not normally needing pesticides and requiring low inputs of nitrogen.

Under the single farm payment regime, farmers can be more ambitious about growing different crops as they do not need to sell into intervention to obtain subsidy payments. The contract price for borage is currently around £2,000 per tonne and ex farm gross margins of £630 per hectare are achievable. A number of companies in the UK offer 'buy back' contracts and agronomy support.

If grown specifically for the pharmaceutical industry, Borage can be grown on set aside land, but as the majority is grown as a food supplement this is not generally possible. However, set aside looks like it is on its way out with the increasing amount of land devoted to biofuels.

The spread of Borage into Warwickshire suggests that to an extent the policy instruments of the new look CAP are working. Of course, it also means less land devoted to conventional food crops, pushing up their price. But, in principle, it should mean that farmers get better returns from the market and have less need of subsidy.

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.

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.

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.

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.

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?

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.

Wine reform will lead to job losses

The competition: a vineyard in Chile

An impact assessment of the European Commission's proposed reforms to the CAP wine regime warns that job losses are inevitable in parts of Europe most responsible for the distillation of wine. The report quotes Italian organisations, not an entirely disinterested source, that the sector could lose 75 per centr of its jobs in Italy.

Reform is also expected to bring down the price of cheaper table wines as wine that would, under the old regime, have been distilled is instead bottled for sale (with binge drinkers in Britain being one possible market). However, specialised table wine producers in Sicily and Languedoc-Roussillion in France could see their income fall by up to a third. Enraged wine makers in Languedoc-Roussillion started fires in several French supermarkets to protest against the reform.

However, CEEV, the European wine producers' federation said that changes in the industry were inevitable in the face of growing globalisation. 'This may be the last chance we have to update the sector', warned José-Ramón Fernandez. 'We welcome the Commission's efforts as long as they are accompanied by measures to move into alternative agricultural sectors that are socially acceptable to producers.'

A Commission spokesman said that the changes were likely to mean less but better wine on the market in the short term, but in the long-term a more competitive market, together with simplified labelling and classification rules, could see production soar. 'In the long-term people around the world could be drinking French and Spanish and Italian wine, instead of New World varieties.'

Perhaps. But New World producers know that the market has changed, with a mass market less interested in provenance and more in having drinkable wines available at an affordable price. In the short run, Australian production could be hit by the country's chronic drought, a topic we hope to cover soon

Plus ça change, plus c'est la même chose

France's new president Nicolas Sarkozy has aligned himself firmly with traditional French thinking on the CAP. He warned that he expected the EU to take a much tougher stance in global trade talks and said that he would not allow his country's farmers to be sold 'at the lowest possible price.'

He said that he would not allow cuts in support for European farmers while their US counterparts benefited from the same policies. Trade offs did not interest him: 'I'm not going to sell agriculture to get a better opening for services.' Mr Sarkozy said he as not going to be 'boxed in' if others failed to make reciprocal offers.

With the Doha Round talks seemingly making little real progress, Mr Sarkozy has dashed hopes that he might to talk a more flexible approach to cutting EU farm tariffs than his predecessor.

Scrap CAP says Commons committee

The Common Agricultural Policy should be scrapped and replaced with a new rural policy for the European Union says the House of Commons Select Committee on Environment, Food and Rural Affairs. The report is a response to the Government's 'Vision for the Common Agricultural Policy' published in December 2005. I appeared before the committee: further details of the report can be found at: CAP

The report states, 'The objectives of the CAP have remained unchanged for the last 50 years and now an anachronism. For all its revolutionary rhetoric, the UK Government's "Vision for the Common Agricultural Policy" was ultimately a disappointing lost opportunity as it merely described an evolution of the existing policy, primarily motivated by budget savings, rather than presenting a truly revolutionary vision.'

I was critical of the Government's strategy and tactics in launching the Vision document. The report comments, 'The Government showed a naivety in believing that its Vision document could be its catalyst to a reform agenda when it was introduced so near to the end of its Presidency and without any programme in place to gain support for the British position. For British ideas to succeed, it is important that the UK adopts a more sophisticated approach to its agenda than when it launched its Vision document on an unsuspecting audience and without prior effort to prepare other farm ministers for its arrival.'

It further notes, 'Not only did this approach subsequently damage its prospects for Pillar 2 development, it may well have undermined the UK Government's ability to infuence the reform agenda in the future by antagonising the European Commission and the other EU member states.'

The report talks favourably of the idea of a bond scheme, but notes Commissioner Fischer Boel's argument that it would lead to the demise of cross-compliance. However, the bond is intended to replace and phase out SFP payments. Separate payments could still be made for public good provision by farmers linked to cross compliance.

The report is perhaps too optimistic about the forthcoming CAP 'health check' offering a means of moving the debate forward given the narrow way in which its purpose has been defined by Commissioner Fischer Boel.

Wine lake threatens to overflow

Chilean 'reserve' wine in oak barrels - see story below

A tabloid newspaper once asked me if I could help them with a stunt whereby a journalist in a boat would row on the wine lake. Needless to say, the wine lake does not exist in a form that lends itself to such an enterprise. Nevertheless, the crisis of surplus wine stocks in Europe is such that the lake metaphorically threatens to overflow.

The Commission's proposed reform measures would not have eliminated the problem, but now their effectiveness is going to be further diminished by dilution at the insistence of wine producing states like France, Italy and Spain, aided and abetted by wine producers among accession states such as Bulgaria and Romania.

The fundamental facts are these: Europeans are drinking less wine (consumption is declining by 0.65 per cent a year) and they are drinking more 'New World' wines from Australia, California, Chile etc. Exports are also declining, so that ten years ago the EU held mpre than 80 per cent of the world wine market and its current share is 65 per cent. Moreover, the accession of Bulgaria and Romania has pushed up production by some 7 million hectolitres.

The structural surplus in the wine market in a 'normal' year is around 12.8 million hectolitres and this does not include the amount distilled for industrial use. The EU is currently spending €1.269m a year on the wine regime, about forty per cent of that being spent on distillation.

Policy instruments have not worked well. The ban on new plantings has not controlled production because yields have increased in some member states and there have also been illegal plantings. The grubbing up scheme has virtually ceased to operate.

Wine is a very conservative industry in Europe and the rigid rules on labelling and wine-making practices hinder innovation. When I visited a Chilean winery last year, they told me that they had two types of wine, standard and reserve, the latter being matured in oak barrels.

Attempts to promote the idea of Geograohic Indications are making little headway anyway, but are not helped in the case if wine by the dichotomy between table wines and 'quality' wines produced in specified regions.

The Commission's original proposal envisgaed getting rid of about 12 per cent of the current area of vineyards. This would not have eliminated the surplus in a declining market, but it now looks likely that the grubbing up programme will be halved.

It is disappointing that the European Parliament has taken a hostile approach to the Commission's proposals. Particular interests have prevailed over more general ones. However, the wine sector itself needs to become more competitive otherwise it will suffer more in the long run.

Sugar reform hits trouble

Last year's sugar reform has hit trouble and it's a familiar story: too much sugar is still being produced in the EU. 2007 production plans show that quotas have only fallen by 2.2 million tonnes over the first two years, well below the 5-6 million tonne target.

Moreover, the new rules also allow most sugar producers to purchase limited quantities of extra quota at €730 per tonne, and many companies who believe that their long-term future is promising have taken up this option, with nearly 900,000 tonnes of extra quota having been bought. In all, therefore quotas have only fallen by a net total of just over 1 million tonnes. Only three countries have ceased production altogether: Ireland, Latvia and Slovenia.

The quota system, together with high support prices, has not only built in large surplus production, but has left no room for imports. The commitment to import sugar from the ACP countries is being replaced over a transition period by quota free imports from the least developed countries and eventually from the ACP countries. The prices set in the EU will still be well above current world market levels even at the end of the reform process and the EU market is likely to be attractive to many producers in the developing world where the option for growing alternative crops is limited.

The reform cut sugar sale prices by 36 per cent over four years and set up a restructuring fund to pay uncompetitive processors and farmers to close down. Factories could choose between competing for sales at the new price, or being paid to cut their production quotas. According to the Commission, sugar facories were reluctant to reduce quotas because it was unclear how much of the restructuring aid they would have to pass on to sugar farmers. The reform gave farmers the right to at least ten per cent of the aid but member states could decide to hand out more.

The Commission is concerned that processors have been discouraged from taking up restructruring as they have been offered too small a proportion of the payment, particularly in the new member states where take up of restructuring money has been much lower than expected. The Commission plans to allow producers to keep 90 per cent of the restructuring money, with the remainder passed on to farmers. In any event, the world sugar market is very volatile and likely to become more so now that the EU has virtually disappeared from world trade.

Commission waters down wine reform

The Commission has backed away from radical plans to reform Europe's perenially troubled wine sector in the face of opposition from member states. The proposals put forward last June offered EU winemakers €2.4 billion over five years as an incentive to dig up their vines and concentrate on producing quality wines.

In particular the vineyard removal scheme will be much less extensive than originally proposed. The target for grubbing up vines, originally set at 400,000 of the current 3.4 million hectares, looks set to be cut in half. In any case, the scheme would continue to be voluntary for producers with no one forced to tear up vines.

All vine-covered land is planned to become eligible for Single Farm Payment to secure the 'Green Box' status of these aids in any future WTO dispue.

The Commission's plans have encountered opposition from some member states, not least Germany who are upset by a plan to ban the use of sugar. German farm minister Horst Seehofer claimed that Germany would lose part of its competitiveness 'if we did without sugar unnecessarily.' A ban on adding sugar would increase the cost of producing wine in Germany by up to 25 per cent. However, Commission officials argue that half of quality German wines are already produced without using sugar.

Accession states face surplus stocks fines

The Commission has announced that all of the 2004 accession states except Hungary will have to pay for failing to stop speculators building up stocks and benefitting from selling them at EU prices. The issue has caused alarm in the new member states who claim that in many cases the build up of stocks was due to hoarding by citizens rather than any profiteering by commercial traders. This was the excuse used by Estonia to explain what would have been huge sugar stocks per household, the argument being that Estonians were preparing for an orgy of jam making which was claimed to be an historic national pasttime.

Poland will have to pay €12.5m for surplus meat stocks, the Czech Republic €12.3m for excess meat and fruit stocks and Estonia €7.6m for milk. However, the relatively poor accession states will be given time to pay with instalments spread out over four years.

Butter mountain finally melts

The satisfied look of this cow in the Azores is no great surprise as it receives one of the biggest cattle subsidies in the EU, although still not enough for Portugal who voted against the last CAP reform on the issue of the fate of dairy cows in the Atlantic islands.

After 39 years of a butter mountain under the CAP, it has finally melted away. When the Soviet Union still existed, stocks of 'ageing' butter used to be sold off to its consumers who were glad to get any butter at all.

The last remaining stocks (in the Czech Republic, Finland and Spain) have been sold off. High market prices have led the Commission to close intervention in Spain, so it only remains open in Portugal.

Stocks reached a peak in 1986 when stocks totalled no less than 1.283 million tonnes, but the imposition of milk quotas helped to curb the build up. The other form of intervention buying in the dairy market, that of skimmed milk powder, ended in 2006.

Dairy intervention arrangements could be abolished as part of the forthcoming Health Check review. Dairy farmers still receive support, however, even though they might like to pretend otherwise. The virtual cow that was launched at the end of the 1990s never made its way into legislation, but dairy farmers receive their payments in another form.

Oxfam has estimated that a dairy cow in the EU can receive a subsidy of as much as $2 a day. Even if this figure is exaggerated, it is more than many people live on in least developed countries.

'We're all doomed'

Norfolk farmer David Richardson writes a weekly column in Farmers Weekly. The magazine has recently undergone a revamp under a woman editor, but David Richardson's column has survived, no doubt because he is seen as an articulate spokesperson for the 'big' farmer.

I met David Richardson once and he is undoubtedly a pleasant and sincere guy who defends his corner as best he can. But it's a pretty unreconstructed corner. Any argument will do to defend protection and subsidies for British farmers. Food security has always been a favourite theme of his in recent years. Defra is, of course, either hostile or ignorant to farmers, unlike good old MAFF. Anyone who fails to buy British food (unless it is a tropical crop) is close to being a traitor, while Global South farmers shouldn't be allowed to export to Britain because their animal welfare standards don't match those in one of the richest countries in the world.

In one of his most recent columns, Richardson claims 'subsidies - particularly the SFP element- are going to be phased out over the next few years.' I've heard a distinguished official at a farming organisation taking a similar line. And I've even heard a similar line taken by experienced BBC journalists who should know better.

Now it's more than likely that the 'financial discipline' will reduce SFP between now and 2013 because of the accession of Bulgaria and Romania but only by probably about seven per cent. Given that Mr Richardson, by his own admission, derives some twenty per cent of his farm income from SFP (and more from other payments), he should still be safe for nineteen per cent.

It's likely that SFP will be reduced further after 2013 but it is unlikely to disappear altogether.

So why are the likes of Mr Richardson making such claims which are remnsicent of the famous line favoured by one character in the old British sitcom Dad's Army, 'we're all doomed'? I would suggest because if such claims are made long enough and loud enough, the public will believe that subsidies are not being paid any more.

It has been claimed that the public is becoming more sympathetic to 'supporting' British farmers, although why a commercial activity should need supporting (other than for the public goods it provides) is not clear. But a mixture of ignorance (about the true cost), sentiment (about the countryside) and nationalism (about food security) can provide a heady mix in support of the status quo.

Fruit and veg reform could bring health benefits

Seeing through the Commission's proposal for reform of the fruit and vegetable regime could bring health benefits. With the exception of Greece and Italy no EU member state is currently meeting the World Health Organisation's recommended consumption rate of 400kg per day per capita. From the viewpoint of Commission officials, getting consumption up to the WHO minimum level would also provide a commercial answer to the sector's marketing problems.

Fruit and vegetable markets are very susceptible to short-term supply and demand crises. These result from both the perishable nature of the product and the susceptibility of both production and consumption to weather conditions. It is hard to underestimate how weather sensitive demand for these product is.

The Commission favours 'Producer Organisations' operating their own 'crisis management' schemes. This is a rather old style 'corporatist' solution which is handicapped by the fact that such organisations do not exist in all member states. In the Netherlands with its extensive glasshouse production sector, 79 per cent of growers are in such organisations. Membership in some accession states is particularly low: 1 per cent in Poland, 3 per cent in Cyprus and 4 per cent in Hungary.

However, some member states have still been upset by the Commission's far from radical proposals. They are particularly opposed to the idea that 20 per cent of an organisation's budget should go on environmental measures and that no more than 30 per cent should be spent on crisis management.

The UK uses a retailer led system of category management with a limited number of suppliers to each retailer, although a supplier may organise several growers. I am currently engaged in two research projects related to the horticulture sector and it has to be admitted that this system does produce greater concentration of ownership and production with retailers able to delist suppliers with little warning. However, the solution to those problems might lie in a more robust application of competition policy, something to be discussed in a future post on the dairy sector.

One Vision, Two Steps

It sounds like a Maoist slogan, but farm commissioner Mariann Fische Boel set out a 'one vision, two steps' plan for the reform of the CAP at the recent Agra Europe conference in London. As she has made clear before, the forthcoming Health Check which will address the period up until 2013 is seen largely as a tidying up exercise rather than an opportunity for further fundamental reform. The Commission is currenly preparing a Green Paper on the Health Check but this is not expected to be ready until after the summer.

However, a substantial shift in the structure of EU financing for agriculture and the rural economy remains a distinct possibility for the period after 2013. In the meantime, Single Farm Payment payments could be cut by 7 per cent a year by 2013 under the Financial Discipline Mechanism. This would result from the continuing phasing in of direct aids to accession states, aggravated by the addition of Bulgaria and Romania which took the SPS payment budget beyond the Pillar 1 budget ceiling. However, Fischer Boel confirmed that the SPS 'will be with us for a long time to come.'

The Danish farm supremo had little time for the two main drivers of CAP reform. She said that 'Thinking about policy must drive the European budget. If we put things the other way round ... we won't have a CAP that can meet the very real challenges of the futuree.' She also declared that she would not allow the Doha Round of international trade talks be 'the main driver of our domestic policy for farms and rural areas in the years ahead.'

In short, Fischer Boel wants to continue the reform process, but she wants to retain a CAP a long time into the future. And, of course, doing the first task makes it easier to achieve the second.

Sea of ignorance

A new Eurobarometer survey has found that 72 per cent of respondents considered themselves to be uninformed on agricultural issues and over half (54 per cent) had never heard or read about the CAP. The 43 per cent who claim to have at least some degree of awareness comprises of 34 per cent who say 'they don't really know exactly what it is' and just 9 per cent who say they know 'exactly what it is'.

Not surprisingly, the highest level of awareness is found in France, where almost two-thirds (64 per cent) have heard of the CAP and nearly one in five (19 per cent) are exactly aware. There is also high awareness in two other beneficiary member states, Ireland (61 per cent, 16 per cent exactly aware) and Poland (60 per cent, 10 per cent exactly aware).

Having been told that 40 per cent of the overall EU budget is spent on agriculture, only 16 per cent thought this was too high and almost 6 in 10 thought that this share should stay the same or increase in coming years. But then presumably if one told some respondents that 40 per cent of the EU budget went on supporting small shopkeepers, one might get a similar pattern of answers.

Those questioned (41 per cent) thought that ensuring the health and safety of food products should be the main priority of the CAP and one might question how far that forms part of the policy.

In between public ignorance and concentrated interests seeking to defend the CAP, it's difficult to find a space in which reformists can insert themselves.

It's nice to have it confirmed

Maurice Faure is the last surviving signatory of the Treaty of Rome. So it's nice to have his confirmation that the Treaty, whose agricultural clauses have never been modernised, was a great deal for farmers.

Faure told the Financial Times, 'The Treaty of Rome was very favourable to farmers.' The new arrangements offering subsidies and markets for France's grain and sugar beet surpluses were 'a big concession by Germany.'

Abolish CAP subsidies

An interesting new blog on this theme here (and a good debate going on in the comments section):
Subsidies

New market develops in farm subsidies

Given that milk quota has been actively traded in the UK, producing so-called 'sofa milkers', it should come as no surprise that Single Farm Payments are now being bought and sold. Agricultural brokers WebbPaton did fifteen deals in one day recently. The market has been described as 'ferocious' with rights to subsidies 'flying off the shelf'. There's an element of risk, but an investor could receive one-third of the original investment back each year.

When the single farm payment was set up, farmers were given the right to trade subsidy entitlements between themselves which makes sense as it allows individual farmers to adjust their own businesses in the light of their assessment of market conditions. Farmers started trading among themselves, but the profitability brought in a wider range of investors. Open auctions are being held, while other investors are buying rights to subsidies over the telephone through brokers or on internet sites. You can find out more at WebbPaton's web site: Entitlement

You have to be classified as a farmer to receive subsidies, but you only need hold a lease on a minimum of 1.7 acres for ten months of the year and never have to visit it. Scottish landowners are now renting out tracts of rocky highland for as little as £5 an acre per year.

The market that has developed does enable farmers to raise funds to retire or to invest in their business. But that could have been achieved by converting subsidies into a marketable interest bearing bond which is what many analysts advocated.

So, goodbye then, President Chirac

The announcement that he will be stepping down as French President by Jacques Chirac reminds us that for a long time France has had a head of state and government who has also seen himself as Minister of Agriculture. Two of his last public appearances were at the Paris agricultural show and a European summit in Brussels, the site of his many battles in defence of French farming subsidies. Chirac owns a cheteau in the Massif Central which is one of the poorest and most sparsely populated rural areas of France.

The Financial Times commented, 'His near-umbilical attachment to the country's farmers throughout his career, which included a spell as agriculture minister, means he can at least count on them to be saddened that the Chirac era is coming to an end.'

Whether any of his possible replacements will take a different view of the French national interest remains to be seen.

Three options for the future of the CAP

The chief economist of the CLA, Allan Buckwell, has been an academic and has worked for the Commission as well as for the landowners' organisation, so what he has to say on the future of the CAP is worth listening to.

He recently outlined three scenarios for the future of the CAP. The first was to defend the status quo and argue for the biggest possible ongoing payments to farmers based on their contribution towards enhancing the environment. He expected this to be the strategy adopted by COPA, the European farmers' organisation. But (and these are my words) it is well known that COPA is something of a political dinosaur that has lost the CAP plot. Environmental groups are not going to be taken in by a continuation of existing subsidies by other means.

A second option was to advocate a more integrated rural policy, with a much bigger share of aid devoted to correcting market failures to stimulate a more diversified rural economy. Buckwell was, of course, one of the architects of the EU's shift towards a rural policy, although it suffered a severe setback with the 2006 budget settlement which actually cut back Pillar 2 funding for rural development. Its success would also depend on profitable commodity prices and national governments matching EU contributions towards rural development.

A third option would be to ditch the CAP and create what Buckwell has provisionally entitled a European Food and Environment Security Policy. Its objective would be to enable the production of socially optimal quantities of high quality food, energy, biodiversity, landscape and so on.

The problem would be, who decides what is 'socially optimal'? If it's not the market, it's the government, influenced by the farm lobbies, and that is what got us where we are - which is not a good place to start from.

EU loses patience over Indian wine tariffs

The EU has finally lost its patience over India's import restrictions on wine and has filed a complaint with the Disputes Settlement Mechanism of the WTO which has been joined by the US.

Farm commissioner Marian Fischer Boel raised the issue on her recent visit to India. She said, 'These products are not staples and the European exporters have a legitimate interest in being able to supply the Indian market. Could we not leave it up to Indian consumers to decide when to buy domestically produced wines and spirits, and when to buy something else?'

The Indian wine industry claims that a reduction in tariffs would 'destroy' the emerging wine industry with a wave of cheap imports. Indian wine makers would prefer a staged reduction in duties, favouring higher quality imports.

An Indian red at, say, 950 rupees (£11.10) a bottle, can be a third of the cost of an Australian shiraz. The Indian Government's stance on import duties means that foreign access to the £930m alcoholic drinks market, growing at nearly 30 per cent a year, is severely curtailed. While India's basic import duties on wine and spirits are 100 per cent and 150 per cent respectively, federal and state taxes can push tariffs as high as 264 per cent and 550 per cent.

The EU has a fair chance of success at the WTO disputes settlement panel which has ruled against Japan, South Kore and Chile over discriminatory spirits taxation regimes. Getting into the Indian market could help drain the European wine lake and taking on a foreign country is a welcome distraction from attempts to reform the EU wine regime which are meeting substantial resistance, most recently from the European Parliament.

'Suspended pessimism' remains Doha mood

Bilateral discussions have continued between the key participants in the Doha Round farm trade talks, most recently in London, but although clarification of the issues and what might be possible continues, there has been little real progress. Key participants in Geneva have described the overall mood as one of 'suspended pessimism'.

One change is that India has now got more involved in the series of conversations that have hitherto primarily involved the EU, US and Brazil. They had stood aside from the intense meetings between the key players that led to the resumption of negotiations agreed at the World Economic Forum in Davos.

However, India's role so far is not seen as particularly helpful. Susan Schwab, the US trade representative, said that progress with the Europeans and Brazilians was not matched by a willingness by Delhi to make concessions.

India has been taking a hard line on the 'sensitive products' exemption. This is also an area of concern for the EU as a means of protecting its most marginal farmers. But if too many concessions are allowed, a coach and horses would be driven through the agreement.

India is also being insistent about the 'special safeguard mechanism' which would permit developing countries to block sudden surges of imports from particular agricultural products. NGO critics have long argued that 'no agreement is better than a bad agreement', but there is a point beyond which the same argument could be made from a free trade perspective.

No one really knows what the outcome will be, but I would put the chances of a successful agreement at less than fifty per cent. But then there were many times in the Uruguay Round when the position looked hopeless.

Biofuels may push up beer prices

I was giving a presentation on the CAP during this week and I was asked if ending it would threaten food security in Europe. My reply was that no one was advocating dismantling the CAP overnight, so any adjustments would be phased in, but that the real challenge to food security came from the rapid expansion of growing crops as biofuels. A structural shift is going on in farm markets.

An illustration of this is what is happening to the price of barley which is used for beer, whisky and animal feed. Strong demand for biofuel feedstocks is encouraging farmers to plant these crops instead of grains such as barley. The price of barley has soared in the past week. Futures prices for European malting barley have risen more than €230 a tonne since last May and by a third on the Winnipeg Commodity Exchange over the same period. Admittedly, other factors such as the Australian drought and heavy rains in Europe have affected barley prices.

The US Departent of Agriculture estimates that global barley production will reach 138m tonnes this year, level with 2006, but 10 per cent down on 2005. Global demand has risen two per cent, the fourth year in the last five in which demand has exceeded supply. Global stockpiles have shrunk by a third in two years. The US, which in the 1980s was a leading exporter of barley, is now a net importer.

One consequence could be a long-term rise in the price of beer. Barley and hops account for 7-8 per cent of brewing costs.

Check this out!

Do check out the new CAP Health Check blog at: Health Check

It will be gathering items from a number of CAP blogs, including this one, and there is also a very useful News Harvester service on relevant topics.

EU's share of global milk production falling

The EU's share of global milk production is falling as a result of the quota system according to Rabobank dairy specialist Mark Voorbegen. Addressing a seminar addressed by Dairy UK, he said that the EU had a 27 per cent share of the global market in 2005, down from the 1995 level of 31 per cent. By 2015 it is forecast to fall to 25 per cent (although by then quotas may have been abolished).

Termination of the EU quota system would become crucial for the long-term global supply/demand balance. Milk volumes in the EU-15 would remain stable in aggregate terms but with some relocation to more favourable areas. There would be a moderate growth in supplies in the accession states.

The UK had a good scale of farming and a good structure but Voorbegen had doubts about its export capabilities and whether it could bring a higher volume of milk into the EU. Just like farmers in Australia and New Zealand, farmers would have to adjust to more milk price volatility in the future.

Rudolf Schmidt, dairy farmer adviser for the German Farmers Union, said that the main challenge in Germany to a competitive dairy industry was from the biofuel industry. An overdependency on subsidies for biofuel 'could drive milk production away.'

Around ten per cent of the German agricultural area, some 1.6 million hectares, are already accounted for by biofuel crops. Moreover, bioenergy was making feed for dairy farmers more expensive.

Just as well they haven't heard the half jocular suggestion that cows should pay a climate change levy for the amount of methane they produce (which has far bigger impacts on global warming per capita than carbon dioxide).

Experts look at the past and the future

Commission officials and leading experts on the CAP met under the auspices of the European Network of Agriciultural and Rural Policy Research Institutes (ENARPRI), The Centre for European Policy Studies (CEPS) and the University of Leuven (KUL) in Brussels on Thursday to discuss the past and the future of the CAP. The interesting discussion was conducted on Chatham House terms, but some flavour of it can be given here.

Biofuels

There was concern about an unthinking rush to replace foods crops by biofuels. One view expressed was that they were a disaster with an incredible increase in the surface area covered in the United States. The missing US exports were equivalent to those of Australia and Canada combined. They used a lot of water which was a more precious resource than oil.

Another speaker drew attention to the number of bills before the US Congress on the ethanol issue. It was seen as nothing to do with farm output but with energy independence, although a cynic might also see a link with the early primary in Iowa.
The mandates (obligations) were a recipe for rent seeking and represented bad policy.

The future balance of the CAP

There was some interest in the development of a policy that emphasised food and environmental security policy. Whilst this was not endorsed by all participants, there was a recognition that a spatially diffuse, multi-dimensional environmental challenge was being managed by fragmented private managers. The key market failure was environmental: climate change.

There was concern about the delay to rural policy implied by the effective halt in transfers from Pillar 1 to Pillar 2. Less was now being spent on Pillar 2 than before the budget discussions. The view was expressed that Eastern Europe had little interest in rural policy because it didn't have co-funding money. More generally, member states wanted to re-nationalise the CAP.

The health check was taking shape. It was a tidying up, a simplification. There was a long check list involving a move away from partial decoupling and getting rid of set aside, but none of it was fundamental. The budget review was much more important, coupled with the renewed discussion on the constitution. Quite a few people wanted to cut the CAP budget.

The easiest way of saving money in agriculture would be to cap big farmers which would also make it easier to defend the CAP. It was somewhat alarming to hear one respected presenter claim that the CAP had been steered towards acceptability and respectability by reform.

The Commission view

Invariably on these occasions I lock horns when the Commission and this happened when I suggested that there were limits to the radicalism of the reform which left 46 per cent of the EU budget spent on the CAP. The response was that this was a strange way of addressing this, given that the EU had a tiny budget. CAP spending accounted for one per cent of public expenditure in the whole of Europe. Farmers made up five per cent of employment, ten per cent of the population lived in rural areas and 47 per cent of the European land surface was farmed.

On that logic if, say, small shopkeepers are three per cent of the EU population, they should get three per cent of the budget in handouts. Farming is meant to be a commercial activity. If it is producing positive externalities, it should be rewarded for that, but the delivery of those outputs needs to be clear and demonstrable.

The producer perspective

The producer perspective on this is interesting. They fear paying twice for the Doha Round (although no one would forecast whether there would be a successful conclusion or not). They also see the single payment as 'nominal' and eroded by inflation (which is a strange way of looking at some of the sums paid out). It is also seen by farmers as a transitional payment which will eventually disappear. However, most of those in the meeting thought that market payments would persist after 2013 and even after 2020. The CAP is a resilient beast.

Farm Bill may not do the trick

The US Farm Bill published last week may not offer enough to revitalise the Doha Round trade talks where the scale of US domestic support for agriculture is one of the outstanding issues. Indeed, given that the bill is likely to be watered down by the Congress and the Senate, prospects are even less good than they might at first appear.

Ag Secretary Mike Johanns stopped short of an EU-style decoupling of domestic support from production. The bill is likely to cost around $10bn less than over the next five years than was spent under the 2002 farm bill. However, USDA admitted that the proposals would cost approximately $5bn more than the projected spending if the 2002 farm bill had been extended over the 2007-12 period. The administration heralded the proposed bill as one that directed subsidies away from the traditional commodity group recipients including rice, corn, cottn and wheat and towards conservation and rural development programmes. Johanns admitted that the proposals represented an evolution of the 2002 bill rather than a radical break from it.

The headline totals do not go beyond the cut in annual allowable trade-distorting farm subsidies that the Bush administration has already informally offered in the Doha round. The controversial counter cyclical payments scheme which compensates farmers when prices are low is to be adjusted but the changes are incremental.

There will be strict limits on subsidy payments to the biggest and richest farmers. The existing subsidy payment limit per individual of $360,000 is retained, but new rules will seek to clamp down on the practice of artificially dividing up large holdings in order to get around the rule. There is also a $7.6bn increase in conservation funding with the focus on improving enviromental quality.

Farm trade deal faces many hurdles

Talks on the resumption of the stalled Doha Round took place in the margins of the World Economic Forum at Davos, Switzerland during the past week, but many hurdles remain to be overcome before an acceptable farm trade deal can be sketched out. Such negotiations are necessarily complex, even arcane, but the essential elements are as follows:

1. Can the EU and US reach an accommodation of their mutual differences? Probably yes, with the EU willing to give some ground on market access and the US willing to concede on domestic subsidies. The notion of 'sensitive' products also gives room for fudges and compromise.
2. Can they sell such a deal to their own constituencies? Much more difficult. In the US, there is a Democratic, more protectionist Congress. Attempts have been made by the White House to square the Colin Peterson, the influential chairman of the House Agriculture Committee, but they may not work, particularly in terms of the renewal of trade protection authority. In Europe, France has presidential and parliamentary elections coming up and already thinks the EU has gone too far in its concessions. The poor state of Franco-German relations leaves Angela Merkel little scope to broker a deal.
3. Can the leading developing countries be brought along? This remains a major difficulty, although Brazil and India have been trying to broker a common position. The real problem is between the US and the emerging countries. The Americans want substantial access to their consumer markets. They are looking for any agreement on farm trade to be offset by reciprocal concessions by Brazil and India on lowering barriers to trade in industrial goods and services. This remains politically difficult.

The recent talks have sought to grapple with the core issues, but the political difficulties remain considerable and there is not much time.

Top level push on Doha Round may not work

An attempt by President Bush and Commission President Barosso to re-start the stalled Doha Round trade talks may not succeed in the face of rising protectionist sentiment in the new Congress and intransigence over subsidies in the EU. Meeting in Washington last week the two leaders instructed their chief trade negotiators to come forward with a deal 'as soon as possible'. Talks involving the EU, US, Brazil and India are likely to take place in the margins of the World Economic Forum in Davos, Switzerland at the end of January.

However, a top level steer may not be enough to overcome the gap between the two sides. The EU does not appear to be willing to offer any flexibility on market access beyond the average 51 per cent on farm tariffs already suggested and the US is not willing to give ground either on its demands on tariffs or on domestic subsidies. The subject of sensitive products which would be exempted from cuts also remains a difficult one, although potentially amenable to compromise.

France has meanwhile declared itself shocked by an interview that farm commissioner Fischer Boel gave to the Financial Times making the not unreasinable point that the CAP faced substantial cuts after 2013. Although this is hardly a relevation, French farm minister Dominique Busserau, no doubt without an eye on electoral manoeuvrings in France, called her suggestion 'an insult to the social model to which European citizens are profoundly and legitimately attached.' Whether they are so profoundly attached to subsidies to prosperous farmers is open to question.

Nevertheless, he defended the CAP as the 'cornerstone' of the EU and said that 0.5 per cent of the bloc's GDP was a small price to pay for food security. He got short shrift from Fischer Boel who sent a robust reply declaring 'It is no insult to the future of ariculture to say right now that the anount of funding dedicated to it will probably not remain at the current level. It would be irresponsible not to make preparations for this.'

Phase out subsidies by 2020 says Miliband

Britain's Defra secretary told the Oxford Farming Conference is committed to a system by 2020 where 'public funds are only used for public goods, in particular environmental benefits.' This would mean the effective end of Pillar 1 and of restraints on trade. 'I see an inevitable process of trade liberalisation, with huge pressure on subsidies and restraints on trade.' Contrary to the views of the farm commissioner, the 2008 CAP health check should be used to pursue a 'further fundamental reform'.

Conservative leader Dave Cameron also called for further reform of the CAP. Exporst subidies should be phased out. 'We also need to start to shift the costs of the CAP onto the countries that spend the most by phasing in compulsory co-financing.'


Mary Coughlan

Irish farm minister Mary Coughlan made the case for providing a reasonable degree of policy stability, arguing that one could not introduce major policy reforms every three or four years. She declared her support for the 'continuation of market supports and direct payments. EU production should be protected from cheap imports', the corollary of which is that EU consumers cannot benefit from them.

She declared, 'The average farm size in the EU could not provide a living for a family at present world prices.' But this is the key question: should public funds be used to sustain commercial enterprises that are not viable, unless they are providing public goods.

Seasonal greetings to our readers

This picture of a somewhat post modernist Christmas tree that I took in Vilnius, Lithuania recently is suitably bleak for a CAP blog

It's been a pretty mixed year for those of us who would like to see a reformed Common Rural Policy delivering real economic benefits to deprived areas in the countryside and promoting environmental goals. The Pillar 2 budget is much smaller than we would have hoped for.

The Doha Round is suspended and it is uncertain whether an agreement can be reached. The EU may then pull back from its commitment to phase out export subsidies which would deliver real benefits to farmers in the Global South. It would also remove what has been the most powerful pressure for CAP reform. In the States, it looks as if we are going to get another Farm Bill that will ensure that most of the benefits go to corporate farmers growing particular commodities.

Some hope that the new transparency about who gets what from the CAP will exert pressure for reform as the public becomes aware that most of the money goes to large-scale commercial farmers. However, Britain and Germany are likely to resist any cap on subsidies. Public pressure on these matters tend to not to be maintained and is confused by the complexity of the CAP and misleading public messages.

In this respect it was alarming to see the BBC's respected environmental correspondent, Sarah Mukherjee, for whom I have a great deal of time, making a broadcast on Radio 5 recently which contained a number of basic errors about the dairy sector and appeared to be an unquestioning acceptance of a NFU press release. The dairy sector in the UK does have real problems, but the broadcast gave a soft treatment to the retailers and their market power.

Our friends at the farmsubsidy.org network are organising a conference on transparency in the CAP in Budapest at the end of January which unfortunately conflicts with other commitments that I have. However, it looks very interesting and further information can be found here:
Budapest

Sustainable farming and food

The highly regarded Food Ethics Council has published an interesting and well informed paper on 'Sustainable Farming and Food'. You can download it at: Sustainable . There is also an oppprtunity to participate in an online discussion on the paper.

I'm not sure that I agree with all the paper, as I think that at one point it does fall into a protectionist trap set by the industry. When time allows I will publish a summary and some comments here. In the meantime, readers of this blog may wish to take a look at the publication themselves.

Parliament throws out modulation plan

The European Parliament has thrown out a plan agreed at the 2005 summit of EU heads of government to allow the transfer of funds from Pillar 1 expenditure on farm subidies to Pillar 2 rural development to be increased up to a maximum of 20 per cent. Only the UK was planning to use the full amount, given that it receives low levels of rural development funding and wants to find money for its ambitious agri-environmental schemes. The Parliament can only delay the eventual decision, as it is not part of the co-decision procedure.

The motion was carried by 599 votes to 64. The Parliament believes that such a high rate of voluntary modulation would jeopardise subsidies to farmers and would also repersent a further step towards renationalisation of the CAP with farmers in different member states receiving differing amounts of cash. The Commission itself would prefer a higher rate of compulsory modulation to a range of voluntary rates.

Because of the summit deal the EU will receive on average 30 per cent less funding for rural development between 2007-13 compared with the current funding period. The Commission asked for €88.75m but this was cut by more than 20 per cent to €69.76m. This will be partly offeset by compulsory modulation, but this was intended to provide additional funds for rural development, not offset cuts made in a budget deal.

Spending more money on rural development compared with traditional farm subsidies is seen as a way of building a more diversified, dynamic and yet environmentally friendly rural economy in Europe.

UK to become net milk importer?

Two separate respected sources, Sir Stuart Hampson and Kite Consulting, have claimed that the UK could become a net milk importer within a few years. Such a story is manna to the supporters of farm subsidies on food security grounds. It also has a good populist feel, allowing papers to run stories about British tea being drunk with French milk if they so wish. But what is the substance behind these claims?

Sir Stuart Hampson, having just finished his year long stint as chair of the respected Royal Agricultural Society of England, argued that the UK could become a net importer of milk within five years if small dairy farmers continued to be forced out of business.

Sir Stuart made his remarks as Defra released figures showing that England lost on average one dairy farm a day in 2005. He argued that supermarkets had a responsibility to pay a 'fair' price for milk, pointing out that up market Waitrose (part of the John Lewis Partnership of which Sir Stuart is chairman) paid a 3p premium to all farmers.

He commented, 'The price paid to the farner is too low, it is not meeting the cost of he farming. I am trying to draw attention that this is a market that has a fair price. [I am not quite sure what such a price is other than a market clearing price]. The decline in incomes of dairy farmers does give me cause for concern.'

Kite Consulting's Milk Forecasts report warned that the UK is heading for its largest ever under quota position. The report's co-author John Allen said, 'The exodus from the dairy industry is running at 7% and accelerating. In the next three years one in five dairy farmers will quit.' With annual demand at 12.6bn litres if the decline continues supply will be as low as 12.68bn by 2011. That meant that by November of that year, when supply is seasonally at its lowest, the UK could see a real milk shortage.

The government and the processing industry hit back

The government was quick to point out that of the 13bn litres produced annually, only 7bn litres went into fresh milk. Robert Wiseman Dairies said the problem for the milk industry was not that it was producing too little milk, but that it was producing too much. 'Unfortunately the volume of milk produced by the dairy farming sector in the UK is such that three in every 10 litres is having to be sold in commodity markets.'

Arla chief executive Tim Smith said that importing liquid milk was unlikely. 'Anyone contemplating importing milk is committing financial suicide. The eye-watering costs of transporting milk from abroad make it unviable. The market price will be adjusted as we near the balance of supply and demand. But it is all down to market forces. We are still in a position of over supply.'

An overview

We should remember that this sector still receives substantial CAP subsidies, even if they are reducing. There is also a distinction between the number of farms going out of production and the volume of production. If smaller (and often unavoidably less efficient) farms mainly go out of production, the effect on volume will be muted, indeed other producers may expand if the price is sufficiently attractive. Of course, a decline in the industry in, say, western England could have landscape and social effects, but that is another matter.

The price UK dairy farmers receive is the lowest in Europe and this in part no doubt reflects the market power of retailers, but that same market power has led to falling food prices and hence a positive effect on the overall level of inflation. Dairy farmers sometimes claim that they are making a loss, but this may be after labour costs (mostly those of the family) have been paid out of the business.

There is no doubt that dairy farming is a particularly demanding type of farming and the rewards are not that great for smaller enterprises. But whatever is done we should not increase the level of subsidy. Production would have to fall a long way before fresh milk supplies are threatened.

New world wines continue their challenge

Santiago, Chile. Yestredya I visited a vineyard here in Chile´s central valley not far from Santiago. This vineyard was founded in 1880 and is currently producing 19 million litres a year. I have seen similar operations in Australia, although not on this scale.

A German in the party asked about the concept of terroir which is very much emphasised by European wine producers giving a wine its distinctiveness. However, this was clearly of no importance in Chile. As in Australia (now suffering from a glut of wine), Chilean vineyards produced drinkable and affordable wines for the world market. They then keep the best wines for themselves, as in Australia. At a reception at the presidential palace in Santiago, I had one of the best reds I have ever drunk.

There is no appellation system in Chile, only reserve wines finished in oak barrels and other wines. The New World wine countries have eight years to come up with a system, but this is proving difficult.

Our guide was less emphatic than those in Australia about the merits of screw top bottles or synthetic corks but pointed out that the rising price of natural cork meant that it could cost as much as the wine.

As the discussions about the reform of the European wine regime meander on, there is no sign here in Chile that the marketing challenge they present to European producers is going to diminish.

US election results not good for trade

Whatever other benefits they bring, the US election results are not good news for agricultural trade. Protectionist sentiment in the Congress has undoubtedly been strengthened and Trade Promotion Authority is likely to be renewed. This makes a Doha Round settlement less likely, removing a key pressure for CAP reform.

The next chair of the agriculture committee in the House is likely to be Minnesota congressman Collin Peterson. His constituency has a strong representation of corn and sugar beet farmers, two crops that have the most to lose under changes to the farm bill backed by agriculture secretary Mike Johanns. He is likely to oppose efforts to change American's generous farm subsidies, thereby weakening incentives for the EU to give ground.

Too many errors in CAP payments

In its annual report on the EU's farm accounts in 2005, the Court of Auditors 'found that CAP expenditure [€48.466 billion last year] was still affected by a material level of error which is not detected or prevented bt the supervisory and control systems.' It noted 'weak internal controls for the majority of EU expenditure, both within member states, and at the Commission, and a high incidence of errors in the underlying transactions.'

Greece was singled out as the worst offender. The Court declared that the quality of inspections in Greece was low and that the reporting of results was unreliable. Farmers' unions are responsible in Greece for inputting all data into the computer system, and can make changes whenever they want - without the changes being recorded. Not surprisingly, instances of farmers exaggerating the size of their land are not uncommon.

All of the olive oil subsidies examined in southern countries were found to contain either an overpayment and/or one of more formal errors. This led the Court to ask whether the Geographical Information System, the system of aerial photographs used to verify the existence of olive tree parcels was doing its job.

The Commission got quite humpy about the Court's findings complaining about its 'focus on finding individual errors in small smaples of transactions.' The Commission noted with apparent pride that it had clawed back €2.17 billion in ineligible payments in 2005. So that's all right then.

Gloomy prognosis on Doha Round

Recent conventional wisdom has been that the Doha Round talks will get under way once the US elections are out of the way with a window of opportunity between then and the spring. After then it would be too late to get an agreement through Congress using trade promotion authority (once known as fast track) although a few months' extension might be possible.

However, the chair of the agriculture negotiations, Crawford Falconer, has now said that he thinks the Doha Round will fail. He still thinks that both the US and the EU have room within their negotiating mandates to improve their offers on reducing farm support, but he suggested that the political will was missing on both sides. There was still the possibility of finding 'an outcome that would work and one that would make a difference', but time was running out.

Falconer's intervention could be a ploy to encourage a focus on the issues and to offset overly optimistic pronouncements by politicians. Nevertheless, it is easy to fall into the comforting belief that, as happened in the Uruguay Round, it will be 'all right on the night'. This time it may not be and the consequences for agricultural trade and further policy reform would be serious.

Green box does distort trade, claims Indian study

A report commissioned by the Indian Department of Commerce and carried out by UNCTAD's Indian team challenges the EU's argument that decoupled aid payments have only a minimal trade distorting effect. According to the researchers' model, EU farm exports would fall by a massive 45 per cent if Green Box subsidies were removed and production would fall by close to 6 per cent.

The EU, US and Canada would all see exports decline by upwards of 40 per cent in the absence of Green Box payments, while Swiss and Japanese exports would fall by over 60 per cent. However, most developing countries would see exports increase by around 20 per cent.

The Green Box issue remains open within the suspended Doha Round negotiations. However, given the EU's attachment to its decoupled Single Farm Payment system, the bulk of which falls into the Green Box, it is unlikely that any Doha Round settlement will lead to changes in the Green Box. However, there could be provision for further discussion of what can legitimately be placed in the box, putting a time bomb under the whole CAP.

Subsidy data to be made public

EU citizens in all member states should soon be able to find out who gets what in terms of farm subsidies, following a decision by Coreper. This may help to create further public pressure for CAP reform.

Ambassadors agreed 'in principle' to open national farm accounts to public scrutiny. However, the decision requires agreement from the European Parliament which hopefully can be obtained by the end of November. It remains unclear whether the Commission or member states will be responsible for publishing the subsidy data, the Commission being reluctant to take responsibility for publishing information it cannot verify.

France is continuing to demand that no subsidy disclosures are made before 2009 when the presidential elections will be safely out of the way. Jack Thuston from the transparency campaign farmsubsidy.org commented, 'It's great news that European governments are endorsing transparency. But it is quite wrong that we should be kept in the dark until 2009, as the French government is reported to be insisting upon. It now falls to elected Members of the European Parliament to stand up for the rights of those they represent. European citizens have a right to know who gets what from the EU and why. Secrecy is bad for European civil society and bad for the reputation of European institutions.'

Even if the public do become indignant at the size of the handouts given to already prosperous farmers, fundamental reform is likely to encounter continying resistance from the Commission. Commissioner Mariann Fischer Boel has dismissed Defra's reform document as 'incoherent' with 'a complete lack of analysis behind this paper' in an appearance before the House of Commons Environment, Food and Rural Affairs select committee. When I appeared before the committee, I argued that the paper was a strong one, but the problem was the lack of a political strategy to put it into effect.

Fischer Boel insisted, however, that many farmers would be unable to survive without the direct payments scheme and would start to abandon their land with adverse environmental consequences.

Visit farmsubsidy.org at Subsidies

Estonians to pay €35 a head sugar stockpile fine

Estonia will have to pay in full the €46 million fine imposed by the EU for stockpiling sugar in the months before accession in 2004, farm commissioner Mariann Fischer Boel has insisted. The fine amounts to the equivalent of about €35 per person.

Estonia has contested the fine at the European Court of Justice, arguing that a large part of the sugar surplus of 91,464 tonnes have been hoarded by private households in preparation for a national frenzy of jam making. Making jam and syrup at home is a common practice in the Baltic state.

Sweden tops new CAP transparency index

On the day when the European Court of Auditors has for the twelfth year running refused sign off the European Union’s annual budget because of concerns about fraud and poor controls, farmsubsidy.org is launching a new Common Agricultural Policy transparency index. The index is based on a comprehensive scorecard that rates all member states according to whether they have released data on who gets what from the EU’s Common Agricultural Policy (CAP). Sweden tops the index with a score of 95%, followed by Denmark (91%) and Slovenia (87%). So far twelve EU member states have released data to farmsubsidy.org.

Criticising poor controls in the EU budget, the Court of Auditors said that 'Beneficiaries — farmers, local authorities, project managers — claim more than they have the right to claim'. Most of the problems occur with payments made by member states not by Brussels, because 76% of EU payments are delegated to member states.

Jack Thurston, co-founder of farmsubsidy.org said:

'Transparency is a guard against fraud and maladministration and a way of reconnecting citizens with their governments. Transparency leads to more legimate and effective policy-making. We hope this scorecard will be used to praise the few EU member states who have embraced transparency and shame the many who continue to hide farm subsidies behind a veil of secrecy. All European citizens pay for farm subsidies, they should have a right to know who gets what - and why.'

Read the CAP Transparency Index report:
Transparency

Are CAP's natural predators awakening?

Farm subsidies campaigner Jack Thurston who runs the excellent website on farm subsidies has responded to the story below on the 'health check' on the CAP: 'As well as payment limits, the health check may also include a minimum farm size to qualify for any payments, i.e. a 'franchise'. The single farm payment has seen a big increase in the number of claimants, often it costs more for the government to administer the payments than the payments are worth. A lower limit on payments was specifically mentioned by Fischer Boel at a public meeting on 17 July 2006 in Brussels. See:

Report

Jack Thurston continues, 'It is currently not clear how the CAP health check will fit in with the review of the EU budget that is scheduled for 2009. What is certain is that we are in an era of fiscal restraint in the EU, so any new money for new projects will have to be found from within existing budgets, highlighting in sharp relief the "opportunity cost" of the CAP. The natural predators for the CAP may finally be awakening.'

Since Jack wrote these notes, Commission Fischer Boel clarified that she will not accept budget cuts to the CAP as part of the general EU budget review in 2009, but admitted that the same guarantees could not be made after 2013.

She also said that 'These are busy days in the kitchen - lots of pots are boiling at the same time. Rather than keeping the door to the kitchen sealed I have decidd at an early stage to give an impression of what is boiling under our lids.' A look at cross compliance was first of the menu, followed by the consequences of partial decoupling and the choice of model for implementing the SPS.

Hardly an inviting or daring menu and some of us would like to see the kitchen closed in its soup kitchen role for farmers.

Health check for CAP

Farm commissioner Mariann Fischer Boel has said that what the CAP will face in 2008 is a health check, consciously avoiding the term 'mid-term review' used by her predecessor Franz Fischler. Her comments follow the recent informal meeting of farm ministers in Oulu, Finland.

One likely subject to arise will be decoupling with the ten pen cent of direct aid payments not paid in decoupled form likely to be targeted. Whether the sigle farm payment should be paid on an historical or flat-rate regional basis will also be examined. At present no EU-15 members are operating the same system and some have variations within their national borders.

The compulsory modulation rate may well rise above 5 per cent. The Commissioner is also keen on capping the amount that any individual farm would receive at €300,000. Such a move would be contentious with Britain and Germany who would claim it penalised efficiency and it is not clear that there is a legally watertight definition of a farm business. However, siphoning off money from large scale farmers and transferring them to the second pillar would create a pot of over €1 billion a year.

The future of intervention payments will also be up for examination with the possibility of it eventually being based by a private storage programme. The Commission is also talking about the abolition of dairy quotas by 2015.

Thus by the middle of the next decade be could have a CAP with very different objectives and policy instruments. It should be less market distorting, and hence WTO compatible, but it would probably leave as much money being spent on agricultural and rural policy. Reformers would thus only get partial satisfaction. They have objected to the objectives and instruments of the old style CAP but also to the opportunity cost represented by the €48 billion a year spent on it.