Is the complexity deliberate?

For all the talk of a drive towards simplification, complexity is a built in feature of the Common Agricultural Policy. It makes it more difficult for critics to assess what the real effects of decisions are. It becomes more challenging to mount a sustained and informed critique.

Bringing agriculture into the co-decision mechanism at the European Parliament was unavoidable given that it was a supposed boost to democracy, but an alternative narrative would be that it gave more opportunities for special interests to defend the status quo.

MEPs have tabled no less than 7,415 amendments to the proposed 2014 reform of the CAP before departing for their long summer recess. It will take until September just to translate them.

With 2,292 amendments on direct payments to farmers alone, changes are proposed to almost every part of the Commission's proposals. There are those who wonder whether the sheer volume of amendments is a deliberate strategy on the part of some member states to defend the status quo. France, Germany and Italy come to mind.

It is going to be difficult to complete the reform process on time. Moreover, what was a less than radical reform in the first place is going to be watered down even further.

Financiers spring to defence of ETPs

The controversy over exchange traded products (ETPs) and their effect on food prices continues with some financial providers say they will not withdraw them. In a report issued this April, Finance Watch, a Brussels-based public interest advocacy group argued that excessive commodity speculation raises prices artificially and damages the market for real buyers and sellers. Read more here: Commodities

Others take the opposite view. They point out that the size of the financial market in commodities is tiny in comparison with the physical market and it is the physical market that sets price - the tail does not wag the dog. Nevertheless, the financial market could still have a disproportionate effect in uncertain conditions.

Against that Guy Wolf from commodities broker Marex Spectron commented, 'The futures market is a forum for buyers and sellers to hedge their exposure that benefits both parties and in fact we need more speculation to help absorb volatility.' Indeed, even a report called Farming Money from Friends of the Earth Europe (FoEE) admits that speculators can bridge the gap between buyers and sellers and provide liquidity in the market.

Twenty-five groups including FoEE are urging member states to use this autumn's review of Mifid (the Markets in Financial Instruments Directive) to curb speculation in food and other commodity derivative markets. They are advocating strict position limits and banning financial entities from speculating in commodity markets. Read more here: Speculation

The largest providers of ETPs have made it clear that they have no plans to withdraw these instruments after a number of operators said that they would. Volksbanken of Austria announced that it was withdrawing investment products linked to agricultural commodities and Germany's Commerzbank removed agricultural products from its Comstage commodity exchange traded fund in July. In March Deutsche Bank, the second largest provider of ETPs in Europe, said it would refrain from launching any new ones based on basic foodstuffs.

However, ETF Securities, the largest provider of commodity traded ETPs in Europe and iShares, the world's biggest ETP manager, said they had no plans to scrap their offerings. Their defenders argue that investment in agricultural commodity ETPs do not result in hoarding because they invest in futures unlike physical gold ETPs which hold bullion in a vault.

Globalization of agriculture inevitably led to its involvement in more sophisticated financial instruments which some would describe as socially harmful. Others see them as an efficient market clearing mechanism. Much depends on how influential they are in the market. At present they are not dominant and an outright ban would be an over reaction.

Banks withdraw food commodity funds

There has been considerable discussion about whether speculation drives food commodity prices up, although no definitive answer. My hunch would be that it tends to make them more volatile which creates difficulties for both producers and consumers.

Now a number of European banks are withdrawing vehicles that make it relatively easy for investors to speculate on food prices: Speculation

The decision represents a victory for campaigning groups such as Food Watch, Oxfam and the World Development Movement. The banks were concerned about reputational damage, no doubt enhanced by upward pressure on prices following the drought in the United States.

Dairy farmers under pressure

The recent cuts in farm gate prices for milk have placed dairy farmers under real pressure and there is no doubt that many of them are not covering the cost of production. Blockades and evident consumer sympathy have stirred many supermarkets to increase the price they pay for liquid milk.

However, that is only part of the story. Half of all milk produced goes for manufacturing and that has always attracted a lower price (although the old Milk Marketing Board had a complicated system that varied the price according to the end use of the milk so more was paid if it was used for chocolate crumb than cheddar cheese).

Manufacturing prices are driven by global markets which are in turn affected by low cost mega dairies in California and elsewhere. There is hope that prices may firm up after the seasonal production peak in Europe. Prices in June were firmer for some products, particularly butter and cream, but average dairy commodity prices fell back by 5.9 per cent at Fonterra's latest Global Dairy Trade auction earlier this month, largely as a resut of increased supply. Prices may well remain stagnant until September.

Factors to take into account include whether product stocks will be sold before the next flush of milk begins in the southern hemisphere where countries including New Zealand, Argentina and Uruguay are efficient producers. The emerging economy growth rate is also an important consideration as it drives greater consumption of dairy products. The recession in Europe also has an impact and British deliveries in the two weeks to the end of June were down 2.1 per cent on the same period last year.

It is also worth bearing in mind that farmers are encountering these financial difficulties despite substantial EU subsidies.

The challenge of feeding the world

The urgent need to increase farm production in order to feed a growing global population was a recurring theme last week with a number of reports and opinions published on the subject.

The words ‘productivity’ and ‘sustainability’ were the key elements of the latest Agricultural Outlook report from the OECD and the UN’s Food and Agriculture Organisation (FAO), covering the years 2012-2021. The UN predicts that the population of the world will increase by around a third from current levels, which will mean farm production will need to increase by 60 per cent over the next 40 years.

This translates into an additional one billion tonnes of cereals and 200 million tonnes of meat a year by 2050 compared to 2005-2007 levels. In order to achieve this level, the report suggests a number of ways that this can be achieved, particularly in developing countries, including supplemental irrigation, improving storage and transport links and the more efficient use of nutrients.

Whether or not this level of production can be reached is another matter and one that many analysts feel is not possible without a considerable overhaul of agricultural policy, the rapid introduction of new technology and in a way that meets the rather loose term of ‘sustainable’ or the contested term 'sustainable intensfication'.

Not so sweet

In article in this week’s Agra Europe, European Commission spokesperson Roger Waite has denied that sugar refiners in the EU market are being treated unfairly and claims that persistently high world market prices are to blame for supply difficulties.

The spokesperson for agriculture and rural development argues that the different mechanisms created by the Commission to release additional product to supply the internal market – the release of out-of-quota beet sugar and the reduced-duty tenders to source imported cane sugar – are not discriminatory, but are “two different systems suited to two different realities”.

Waite was responding to an Agra Europe article written in May by Gerald Mason of sugar refiners Tate & Lyle which was highly critical of the Commission’s management of the sugar market.

Waite concedes that the loss of exclusive rights to imported cane for refining after the 2006 reforms has created some difficulties for the former ‘traditional’ refiners. But he notes that these companies received EU restructuring aid totalling €150 million in the aftermath of the reforms.

In addition, the article reiterates the EU executive’s determination to liberalise the internal EU sugar market by abolishing production quotas from 2015. This will be welcome news for many sugar-using companies within the EU but conflicts with many MEPs from sugar-producing member states who are pushing for an extension to 2020.

The sugar lobby has always been a powerful one, but lost ground after the WTO judgement on the EU's sugar regime.

Farmers go for pre-nups as land prices soar

The rise in the price of farmland is leading increasing numbers of farmers to sign pre- and post-nuptial agreements to protect their wealth from enlarged divorce payments to their spouses. A roll in the hay can clearly have consequences not envisaged in the past.

Farmers who have not completed such an agreement face the unwelcome prospect of selling farmland or borrowing money to finance a divorce settlement. Farming divorces are complicated by the fact that the farm is usually the marital home, meaning its value is taken into account when deciding financial settlements for ex-wives.

Selling off part of the farm is not really a solution. 25 years ago a farm might have been viable between 500 and 700 acres, but today something like 1,200 acres is needed to sustain a profitable business, even with CAP subsidies (which are related to the farmable area anyway). If the farm is reduced in size, it may no longer be able to support heirs, particularly if more than one wants to be involved in the farm business.

According to the National Farmers Union it has had more calls from members on this topic since the 2010 ruling involving German heiress Katrin Radmacher which stated that courts can take pre-nups into account when deciding settlements. It has handled 40 referrals from members seeking advice on divorce and pre-nups over the last three years.

This gives a new meaning to the term selective benefit in the pressure group literature. Anyone can get advice on a divorce from a family lawyer, but they may not encounter that many cases involving farms and be relatively unfamiliar with the special considerations involved. That is where an organisation like the NFU can help, showing the relevance of Olson's by-product theory of selective incentives which seeks to explain how lobbying activity can be sustained in the face of the free rider problem

Fields of gold

English farmland has gone up in value by more than 10,000 per cent in the last 60 years. Research from agent Knight Frank shows that an investor who paid £56 an acre for land when the Queen ascended the throne in 1952 would get £6,073 if they sold today, although that is slightly below last June's average figure of £6,156.

Land values started to soar once the UK joined the European Community in 1973. Farmers were then able to benefit from CAP subsidies and land values rose by 390 per cent between 1972 and 1982. There had been subsidies before then, of course, but deficiency payments were more closely related to market fluctuations than blanket EU subsidies. Another consideration was that farmland looked like a relatively safe asset class against the background of the economic turmoil of the 1970s

The 1980s were less buoyant, but in the 1990s demand started to outpace supply, pushing up prices. In 1995 flexible farm business tenancies were introduced which made it more attractive for farmers to rent out land. This led to less land being available on the market at a time when demand was rising.

The recent debate over global food scarcity has reawakened interest in land, along with the drive for alternative fuel sources. However, it may be that prices have peaked. Yields are very low, 1 per cent at best, and farm businesses have an erratic performance due to the impact of the weather and other factors beyond the control of the farmer.

There were important tax incentives relating to land ownership, relating principally to income tax, capital gains tax and inheritance tax. Measures to cap reliefs from trading losses at 25 per cent of income or £50,000 whichever is the greater, will restrict the possibility of offsetting losses on farm businesses.

Many purchases are, however, are lifestyle related. The British tradition of spending a weekend in the country has survived and one way to demonstrate that you have arrived is to buy a country estate. There will always be a strong demand for estates with sporting rights, particularly if they are within an easy drive of London.

The other side of the coin is that it is difficult to break into farming other than by inheritance. Tenancies do not become available that often and local authorities are cutting back on their portfolios of entry level farms to release their capital value. Whilst statistics sometimes exaggerate the ageing profile of British farmers because some of them are in semi-retirement, the industry needs a constant influx of innovative younger people.

It's not an easy life, though. Hours can be long, there is a high rate of deaths and injuries from accidents and there is a lot of often monotonous work. To succeed you need a combination of farming, technological, business and marketing skills. But for some people it is the only life. Two of my nephews grew up on a very successful Welsh farm that has been in the family for generations. One stayed on the farm and loves it. I will be visiting an exhibition of pottery by the other one later this month.

Olive oil crisis hits Southern Europe

Unwanted surpluses are a recurrent problem of the CAP. And now the troubled Southern European countries have been hit by a surplus of olive oil, driving down prices to uneconomic levels. Domestic consumption of the diet staple has fallen because of the economic crisis: in Greece and Italy it has fallen to 1995 levels and in Spain to 2002 levels. At the same time there has been a bumper crop in Spain. The price of premium extra virgin oive oil fell this month to $2,900 a tonne, the lowest since 2002 and down more than half from nearly $6,000 a tonne in 2005.

Spain, Italy and Greece account for some 70 per cent of the world's output. The crop is crucial for some of the poorest regions of Spain including Andalucia, where the unemployment rate was 33 per cent last quarter. Urged on by farmers' union Copa-Cogeca, the EU has started to pay companies to stockpile oil.

Intervention buying was one of the worst features of the old style CAP. It costs money to store the produce and often it deteriorates in quality over time. One then faces the problem of how to sell it without causing market disruption. In the past 'ageing' butter was sold to grateful consumers in the Soviet Union while skimmed milk powder was dumped on third world countries, driving local dairy farmers out of business. Such outlets are not available for olive oil.

Green confusion

Agra Europe reports that support has been building in recent weeks for the idea of member states being offered a menu of options for the ‘greening’ of the CAP post-2013, with a majority of member states backing the plan. But EU farm commissioner Dacian Ciolos took the opportunity at last week’s Farm Council meeting to speak out against taking this route, pushing instead for the principle of greening ‘equivalence’.

Ciolos argued that if member states were allowed to effectively pick and choose which environmental actions would be eligible for the ‘greening’ component of the new direct aid scheme, there woud be a risk of creating an unequal state of affairs across the bloc. Some actions which certain member states may deem appropriate for their particular situation may be more or less ‘beneficial’ to the environment than those implemented in others, for example. An alternative view would be that such an approach is compatible with the notion of subsidiarity.

The proposed menu option, which also drew the ire of environmental groups last week, goes against Ciolos’s ideal that 'quality and consistency' should apply across the EU27 when it comes to the next CAP. The three EU-wide measures that the Commission is proposing for the ‘greening’ elements of the direct payment scheme might also be seen as fitting better with the Commission’s push for 'simplification' of the CAP.

This disagreement between the Commission and member states highlights the fact that the EU farm sector is not as united as the Commission no doubt hoped it would be at this stage. But with 27 diverse member states with differing climates, farmland types and political systems around the table – and against the backdrop of one of the worst financial crises Europe has ever seen - the Commission will almost certainly need to show some flexibility. Or to put it another way, there will have to be another messy and incoherent compromise in order to secure agreement.

These greening proposals have always been ill thought through in my view and risk a lose-lose outcome of damaging farm businesses whilst not helping the environment.

Have farmers less to whinge about?

Sometimes I think that Farmers Weekly should be called Whingers Weekly. Often it's the weather - too hot, too cold, too dry, too wet. Admittedly, it is a challenge in the UK's variable climate. Then it's often prices (where dairy farmers have real concerns) or late payment of subsidies. After that it's vegetarians, defenders of the badger and opponents of GM crops (both of the latter two go way over the top on many occasions). Or it's retailer power, and that's where I have real sympathy with farmers. Let's hope the new supermarket ajudicator makes a difference.

Anyway the NFU has launched a new campaign to boost the image of British farming. Apparently the president is going to emulate the Jubilee by going up the Thames in a farm themed boat to the House of Commons: Farming

Last year farming was one of the most profitable industries in the UK, lifting aggregate net profits 25 per cent to £5.7bn. Measured against other sectors only mining and oil saw bigger growth according to UBS, the investment bank. Of course, farming can have bad years as well as good and not all sectors are doing well, but it does lead one to wonder whether such large blanket subsidies are needed.

As NFU presiden Peter Kendall points out, modern farms make a great deal of use of ICT and 'It's now a high-tech industry, not the way it was 10 years ago.' Pardaoxically, consumers may like a more bucolic image, but then they also want a ready supply of cheap food.

The good times may also be over before they beagn. Farming is fossil fuel intensive and in the long run prices are likely to rise in real terms despite the current dip. Farmers do, of course, pay a lower level of duty on 'red' diesel (sufficiently lower to lead to its occasional illegal use). Supplies of grain are rising which is likely to depress prices. Turmoil in the eurozone may hit exports and the rise in the value of the pound will reduce the amount received in subsidies. However, demand for food is likely to continue to rise, pushing up prices.

Hollande appoints farm minister

One of the first appointments made by President Hollande’s prime minister Jean-Marie Ayrault was to make current MEP Stéphane Le Foll the country’s new farm minister.

A close ally of Hollande, Le Foll’s appointment may prove to be an extremely shrewd move by the new French president as the Socialist MEP has been heavily involved in scrutinising the European Commission’s CAP reform proposals as part of the Parliament’s agriculture committee and is a substitute for the budget committee. I have seen Le Foll in action myself when I have given evidence to the agriculture committee and he is clearly very smart.

Le Foll has also authored a report calling for measures to help EU agriculture adapt to the effects of global warming. It is likely that he will push for a stronger ‘greening’ element at the CAP negotiating table, which will not please some British farmers, as well as a fairer distribution of aid among member states. Of course what is 'fair' is very much in the eye of the beholder.

Backlash against open government

It's no real surprise that there has been a backlash against transparency and open government in the CAP and that the group at farmsubsidy.org who try to shine light in dark corners are facing greater difficulties following court cases: Transparency

Revealing details about payments to individual farm businesses discloses how much some large businesses and food processing firms are receiving from the taxpayer. The bigger you are, the more you get. Of course, it could be argued that the CAP is a very inefficient way of delivering income supplements and that if it is there to promote competitiveness, more is likely to go to bigger farms which tend to be more efficient (and also have a better record in areas like animal welfare).

If one was designing the policy again today, we wouldn't end up with what we've got. But we are constrained by starting from where we are in trying to make reforms.

Greening proposals watered down

Agra Europebroke the news last week that member states are demanding greater flexibility when it comes to the ‘greening’ elements of the proposals for the CAP post-2013.

It has now reported that the proposal for an alternative ‘menu’ with a range of options was said to have been warmly welcomed by a majority of states at a subsequent Special Committee on Agriculture meeting. This could mean that the European Commission’s much-vaunted plan to tie 30 per cent of direct payments to just three EU-wide ‘greening’ measures from 2014 is dead in the water.

As the influential CAP commentator Chris Horseman has argued, it could be said that by not making crystal clear the purpose of ‘greening’ the direct aid payments to farmers under Pillar 1, the EU’s decision-makers have allowed the more influential member states to grasp the nettle and shape a more politically-palatable proposal in its place.

Although the new menu proposal is almost certain to be more acceptable to member states, it is unlikely that they will allow for a more environmentally-sound policy than the original ‘greening’ measures put forward by the Commission and environmental groups such as Birdlife International have already made their feelings known, claiming it will mean 'Europe’s most environmentally harmful farmers to get away without changing anything.'

However, it is arguable that the original proposals were too inflexible and would simply create transaction costs without a favourable environmental outcome. It is not easy to devise cost effective policy instruments for agri-environmental policy that also avoid the 'additionality' problem, i.e., paying farmers for doing something they would have done anyway. Many farmers do see themselves as trustees of the land they own or rent on a long-term basis.

However in the UK the practice of taking on additional parcels of land away from the main farm to make it a commercially viable unit may not help this notion of stewardship.

Amid the wreckage

Alexander Stubb, Finland's EU affairs minister, is quoted in the Financial Times as saying. 'The worry I have in the whole European debate - and we have seen it in the French presidential elections, we see it in the Netherlands, we have also seen it in Finland - is that some fundamentals of European integration are under attack. They include Schengen, the ECB, the euro, the internal market and trade policy. And you know, if we take them away, what's left?

The short and unfortunate answer is the Common Agricultural Policy which still dominates the EU's budget. There is a certain irony in the possibility that among the wreckage of European policies, the CAP would be left standing. Arguably it is the most dysfunctional of the EU's policies.

Stubb, by the way, is a self-confessed EU nerd. Intrigued by his English-sounding name, I found that he went to high school in Daytona Beach, Florida, took his first degree in the States and has a PhD from LSE. Read more here: Stubb

Completing CAP reform on time

In this week’s issue of Agra Europe, editorial director Chris Horseman, who is one of the most experienced and knowledgeable observers of the CAP, suggests that the deadline of January 1, 2014 for the new CAP could be missed unless EU leaders can conclude the Multiannual Financial Framework negotiations by the end of this year.

Horseman argues that the crux of the problem is the fact that MEPs have taken the view that they are not in a position to pass judgement on how CAP spending should be allocated in 2014-2020 if they do not know how much overall spending will be available. Therefore, the need for their Council counterparts to agree a financial framework to provide funds for the Single Farm Payment system becomes an imperative.

However keen the European Commission may be to keep the negotiations on the reform of the CAP and on the future MFF technically separate, the two issues are politically inseparable, Horseman says, before exploring the ramifications and potential scenarios instigated by the deadline for CAP reform being missed.

It has been my view for some time that the deadline would be missed and that January 2015 was a more likely date. It has also been my view that the involvement of the European Parliament would slow down the process and make reform more difficult to achieve. The requirements of a democratic process mean that it should be involved, but the effect on outcomes may be less desirable.

The crux of the issue is that when European domestic governments are practising austerity, and are likely to do for some time to come whatever the calls for a growth strategy, it becomes increasingly difficult to justify the share of the EU budget devoted to the CAP. There is a high 'opportunity cost' in terms of money that could be spent on infrastructure projects that would help employment and research and development that would enhance Europe's flagging competitiveness.

Even within the farm budget there is a strong case for spending more on applied research which would help European agriculture to meet food security challenges in a sustainable way much more than blanket subsidies.

CAP reform proposals 'too complex'

The Court of Auditors has published a report arguing that the proposed CAP reforms are too complex and will not achieve the desired aim of simplification. They might not end the controversial practice of 'sofa farming'.

The Court recognises the efforts made by the Commission to simplify the provisions of the CAP and to address a number of observations made by the Parliament, the Council and the Court. However, the Court considers that the legislative framework of this policy remains too complex.

For example, six distinct layers of rules govern rural development expenditure. With respect to cross compliance, the Court considers that, in spite of the proposed reorganisation, the complexity of this policy continues to make it difficult for paying agencies and beneficiaries to administer.

In spite of the claim that it focuses on results, the policy remains fundamentally focussed on spending and controlling expenditure and therefore oriented more towards compliance than performance. In particular, the specific objectives of direct payments to farmers are not set out in the articles of the relevant regulation, nor are the expected results of those provisions or the type of indicators to be used to measure such results.

With respect to rural development, the Court has underlined the importance of setting out specific concrete objectives that the proposed measures are designed to achieve and of ensuring that support is targeted to rural areas where the aid is most needed. Similarly, the objectives and qualitative and quantitative results that are expected of the implementation of cross compliance obligations as well as of the ‘greening’ component of direct payments are not adequately laid down. The disclosure of such objectives would help focus the policy on delivering the desired results.

The Court has noted the Commission’s intention to direct CAP payments to “active farmers” and to achieve a more balanced distribution of direct payments among beneficiaries. However, the Court considers that the risk persists that payments may continue to be made to beneficiaries who do not exercise any agricultural activity. Furthermore, the Court notes that the redistribution effect of the reduction of the amount aid when such aid exceeds certain levels (“capping”) will be limited.

Furthermore, the Court has doubts as to whether some of these proposed measures can be implemented effectively without imposing an excessive administrative burden on national managing agencies and on farmers. As a way out of this difficulty, the Court suggests adopting a general and simple definition of what constitutes an “active farmer” and to entrust the Commission with the task of managing the implementation of the resulting legislation with a view to reaching the high level objectives set out in the Treaty. These objectives are to increase agricultural productivity as well as increasing the individual earnings of persons engaged in agriculture.

The Court notes that the Commission estimates that the proposed reform is likely to result in an increase of 15 per cent in the costs of managing the direct payment schemes which will be borne by Member States. The Court notes that no information is available on the extent to which such additional costs might be offset by increased management or policy efficiency.

Accession state farmers get little money from CAP

96 per cent of direct payment beneficiaries in the new member states received no more than €5,000 in the 2010 financial year according to Commission figures. The average amount in the EU-12 was €1,550 per farmer. In overall terms 80 per cent of farmers received 20 per cent of the payments. It should be noted that payments are still being phased in in the new member states.

Just over 60 per cent of European farmers received less than €1,250, although quite a few of these would be part-time farmers. Nearly 4,000 received more than the proposed cut off point of €300,000. 1,660 of them were in Germany, 390 in the Czech Reoublic, 330 in Spain and about 310 in the UK.

The Commission notes that 'the direct payments have lost their compensatory character over time' (which is how they were justified at the time of the MacSharry reforms) 'and have increasingly become a support ensuring a certain farm income stability and in combination with cross-compliance, promoting sustainable farming activity.'

If the objective is to stabilise farm incomes, Single Farm Payments are an inefficient way of doing it and a blunt instrument to promote sustainability.

More regulation urged in French presidential election

One would not expect candidates in the French presidential election to advocate less spending on the CAP or looser regulation, but there are significant differences of emphasis.

President Sarkozy said that he would focus his efforts if re-elected on improving the competitiveness of French farmers. 'Farmers are entrepreneurs, they want to live from work, not from direct aid.' he said.

One might question how far the CAP in its current form encourages them to be enterprising. However, Sarko was clear that France 'would fight against all attempts to reduce the CAP budget.'

Francois Hollande said that basing aid on farm size was unfair to specialist producers who had holdings of only a few hectares. Aid should take employment on farms into account. Needless to say, some French producers would benefit.

He also said that there should be more regulation of supply, saying that there too few policy instruments and specifically regretting the phasing out of milk quotas as a regulatory tool.

Many commentators, of course, favoured getting rid of the rigidities which this system introduced and which did nothing to boost the international competitiveness of the EU's dairy sector. But then that is clearly not a concern for Hollande.

Subsidy cuts could be deeper than anticipated

The cut in single farm payment subsidies could be deeper than the anticipated four to five per cent according to Richard King of Andersons. He thinks that pressure on the EU budget could see the amount of money available through the reformed CAP reduced by twelve to fifteen per cent.

In real terms the loss would be even greater and farmers in Scotland and Wales could see bigger cuts as payments moved from an historic to a flat rate basis.

Snaller traditional family-run mixed farms were likely to be hardest hit by the cuts, as many relied on subsidy payments to get anywhere near making a profit.

Panorama programme causes controversy

A Panorama programme on Monday evening on farm subsidies has not surprisingly caused controversy: Panorama

I felt that the programme focused too much on the issue of 'sofa farmers' which admittedly makes for good journalism. If one is going to have subsidies, this arrangement is actually a second best solution as it allows farmers to convert their entitlement into a capital sum - although a bond scheme would do that more efficiently.

The programme also did not really tackle the contradictory objectives of the CAP. If it is a social policy, then it should be designed as such. But if it is intended to promote the competitiveness of EU agriculture, then it is not so inefficient to subsidise larger farmers who are generally more efficient.

14,500 farms would be hit by capping

Some 14 500 farmers or businesses in the EU could see their direct payment cut in two years’ time, new figures indicate.

Any farmer receiving a net entitlement of more than €150 000 in aid payments is likely to see their payment reduced under the Commission’s controversial proposals on aid ‘capping’. New figures from the EU, relating to 2010, reveal for the first time the extent to which farmers throughout Europe would be affected.

The figure also show that those 14 500 businesses received almost 11 per cent (€4.4 billion) of the total €39.7bn handed out to 7.79 million recipients. Around 4 000 farms got more than €300 000 each, netting more than €2.2bn between them.

Drones to police CAP?

A report has claimed that unmanned drones might be used to detect breaches of CAP subsidy rules: Drones

Satellites have been used in the past to detect attempts at fraud and they have had their successes as when a farmer tried to claim for fields located in the mid-Atlantic. However, their effectiveness can be affected by weather conditions and they do not work well in mountainous terrain.

Wine reform up for grabs

Farm commissioner Dacian Ciolos has announced that a high level group is to review the 2008 wine reform: Wine

Traditional wine producing states have been unhappy about its effects but it benefitted smaller producers like the UK which saw some bureaucracy removed.

Why the Indian wine market is not taking off

With its rising middle class one might expect a growing demand in India for quality wines. But the reverse is the case. Wine volumes fell 15.7 per cent between 2009 and 2010.

China offers a stark contrast. It imports 2.5m cases of Bordeaux a year. India imports only 100,000 cases of wine a year. More is sold to the Maldives which are, of course, a major destination for western tourists.

In the UK consumption per adult of wine is 27.7 litres a year; in China it is 4.5 litres a year; and in India 0.01 litre a year, the equivalent of two teaspoons. Indians also consume less beer, barely one litre per person per year, compared with 23 litres in China, slightly above the world average.

The biggest obstacle to more sales is price which is the result of a punitive tariff on imported wines and spirits of at least 150 per cent. On top of that individual states apply their own taxes which range from 30 to 100 per cent. Gujarat, a state with one of the fastest growing economies, bans the sale of alcohol altogether. Labelling requirements are another obstacle to distribution.

A bilateral trade agreement with the EU is supposed to tackle the issue but talks have been dragging on since 2007 and no deal is in prospect. Mahatma Gandhi's austere doctrine still carries some weight and the government is concerned that cheap alcohol might blight the lives of poor people.

Indian wine has not enjoyed a good reputation, although the Mogul empire in 16th century India was supplied with wine from the High Indus Valley and Afghanistan. Quality wine production has increased with the support of subsidies and low-cost loans, but this has led to an over supply problem.

No deal before French and German elections

No deal on CAP reform will be reached until after the French election in 2012 and the German election in 2013 according to Defra minister Caroline Spelman speaking at the Oxford Conference. She also said that Britain was reaching out beyond its traditional allies in Scandinavia and the Netherlands to countries such as Slovakia and Romania to build an alliance against the 'capping' of CAP payments to large farms: CAP reform

Opinion at the Oxford Conference and in polls of farmers was sharply divided on whether British agriculture could flourish outside the EU.

How would you spend your £200?

Each of us spends on average £200 on the Common Agricultural Policy. How would you spend your £200. Try the interactive survey here: Survey

The European crisis, Britain and the CAP

The outcome of the eurozone crisis remains unknown, although none of the measures taken so far have really tackled the fundamental problems of sovereign debt and structural uncompetitiveness in Southern Europe.

What effects will the exercise of the British 'veto' have on attempts to reform the CAP? NFU policy director Martin Haworth is one of the most experienced individuals in agricultural politics and policy and he told Farmers Weekly that only time would tell if Britain would be marginalised in Europe and hence have less influence on a range of issues.

He made a distinction between Britain's largely unsuccessful attempts to secure CAP reform and broader efforts on regulation. He noted, 'The UK has pursued CAP reform policies ... which have pursued UK negotiators on the margins of the debate, so it is unlikely that Mr Cameron's actions will change the way in which the UK is already viewed with regards to CAP.'

'However, on broader regulatory matters where the British voice has been heard in recent years, for example on environmental and market regulation matters, Mr Cameron's actions may affect Britain's influence in the EU.'

The NFU is concerned about a scenario in which agricultural powers were repatriated to the UK, although Eurosceptics have focused mainly on various forms of labour market protection and the Common Fisheries Policy.

A NFU briefing document states that 'A worst-case scenario would see the UK remaining in the single market but regaining autonomy over support arrangements.' The NFU fears 'That would allow the Treasury to achieve its long-standing goal of removing direct payments altogether.'

Supposing Britain left the EU or repatriated CAP payments, the withdrawal of subsidies overnight would cause chaos in agriculture. In principle one might want to see a return to a deficiency payments system which was the more market attuned form of subsidy that existed before Britain joined the EU.

However, in practice, it would be costly to dismantle the existing (albeit rather inefficient) administrative apparatus and replace it with a new one. One would therefore have to pay farmers the SFP on an historic basis, tapering the amount paid over time so that one might start at 90 per cent of the existing payment.

More radically one could compensate farmers for the subsidy by issuing them with interest bearing bonds which could also be sold on the market but that would probably be unacceptable to the parties involved.

Meanwhile British farmers who had opted to be paid in euros have been converting them into pounds on the spot market rather than waiting for a more favourable rate (which, of course, might well not materialise).

It is generally larger farmers who take payments in euros and they usually have some form of relatively sophisticated risk management in place, including hedging.

The crisis has also injected some uncertainty into the market that trades in English Single Farm payment entitlements. If CAP reform is not agreed in time for the 2014 claim, which in my view is more than likely, the purchase of entitlements now would give buyers access to claims for the years of 2012, 2013 and 2014 for little more than the value of one year's SFP.

Leading broker Webb Paton is reported to be doing about 15 deals a day. The existence of such a secondary market might seem to be perverse but, given that we have farm subsidies, it is a 'second best' solution that facilitates their more efficient allocation.

Biopesticides on the march

I have just returned from an Informa conference on biopesticides (or biocontrol) in Amsterdam where I talked about the implications of the new EU legislation on plant protection products which is now starting to be implemented.

What was striking about the conference was not only the relatively large attendance (100), but also the number of large chemical companies present, particularly from the United States. Monsanto, Bayer and BASF were out in force while the largest specialist biocontrol company, AgraQuest, was also strongly represented.

The market for biocontrol products is now growing much faster than that for synthetic chemical products, the availability of which is diminishing. Of 400 or so active ingredients now authorised in the EU, getting on for a quarter are biocontrol products.

The biggest market for biocontrol products up to now has been in protected crops (greenhouses and polytunnels). There is certainly scope in field vegetables where residue issues are important for the final consumer, but we are some way off broad spectrum products which can be used extensively on arable crops.

Historically there were some poor products on the market which did not help the reputation of the industry. The so-called 'grey market' products or bio stimulants, which are generally outside the scope of regulation, are also a challenge in marketing terms.

For growers biocontrol products offer a lower kill rate and often lower stability because of their very character. They also require more technical expertise in their use. They can, however, be used in combinaton with chemical products in many cases which is consistent with the EU policy of integrated pest management.

There is no doubt that the US has done a better job than the EU in promotning and regulating these products (this is also true of the life sciences industry more generally). The new EU regulatory framework, including zonal mutual recognition, should make life easier but the devil is in the detail.

Green space controversy grows

The controversy over the so-called 'Green Space' in the CAP reform proposals is growing: Green Space

A somewhat embattled farm commissioner, Dacian Ciolos, is insistent that the proposals do not amount to set aside. As farm as farm organizations are concerned, if it walks like a duck and talks like a duck ...

The farm lobby is up in arms over this proposal and are citing food security arguments advanced by the G20. However, this is not a straightforward food security/productionism versus the environment argument. I am concerned that the Commission has devised a rather blunt policy instrument that would not be very effective in achieving its objectives and would have too many unintended consequences.

Admittedly some of the more subtle policy instruments in Pillar 2 have not always worked well in terms of additionality, i.e., achieving something that would not have been achieved without spending public money. Devising policy instruments that make a difference without too many side costs is not easy, but the effort needs to continue.

The linked report also refers to the enhanced role of the European Parliament in the decision-making process. This may be an advance for democracy, but not necessarily for coherent policies and effective reform.

Doha lite?

The recent G-20 summit was understandably dominated by the eurozone crisis so little attention was paid to the fact that leaders decided to effectively abandon all hopes of achieving a full blown Doha Round settlement and instead see if they could achieve a 'Doha lite'.

Many analysts think that they will achieve nothing. Either way this effectively means the end of 'Rounds' as a way of progressing international trade negotiations. Given the economic backdrop, it also means the end of further breakthroughs towards liberalisation, although the dispute settlement process could still spring some surprises, particularly in relation to agriculture.

The trend towards bilateral deals will be reinforced. Compared with a multilateral framework, such deals tend to be more asymmetrical, so this is not really a gain for the Global South, not that least developed countries got that much outof multilateral negotiations. It was agricultural exporters like Brazil that stood to benefit.

The global financial crisis has obviously shifted priorities over this issue. However, at the very least a ‘Doha-lite’ deal for developing nations will be discussed at a World Trade Organisation meeting in December this year, with an aim of reaching a consensus in time for the 2012 G20 summit in Mexico.

Will progress be possible in agriculture? The EU may stick to its promise to phase out export subsidies, although possibly later than planned given that CAP reform is likely to be delayed. However, EU is unlikely to give much more ground on market access and the US will defend politically sensitive subsidies for crops such as cotton.

It may be that a shortage of government money will now drive reform, but budgetary changes are open to fudging and they never provided as sure a pressure for reform as international trade negotiations. At the end of the day, manufacturing and service industry interests did not want to see potentially lucrative deals derailed by agriculture. These trade offs were one of the benefits of a multilateral negotiating framework.

Good objective, wrong means

Choosing the right policy instrument to achieve your policy goal is of central importance in designing and implementing an effective agricultural policy as I argued in an article in West European Politics in 2010:
Policy instruments

I am very much of the view that environmental policy needs to be embedded in the CAP, but one has to do this in a way that achieves ecological objectives without unnecessarily undermining production.

The Commission's notion of a 'balanced' rotation seems sensible on the surface. After all, farmers rotate their crops for agronomic reasons that have been understood for centuries, at least in principle.

Monocultures of wheat and oilseed rape (canola) crops have been becoming more extensive in Europe and they can have a landscape impact, although personally I quite like the yellow of oilseed rape.

Part of the Commission's motivation seems to be an idea that rotation would cut the pesticide bill, but there are other ways of doing that. It could also disproportionately hit farmers on heavy soil who rely on wheat/wheat/rape rotations.

The proposals require farmers to grow at least three different crops, with none exceeding 70 per cent of the total farm area and the third not less than 5 per cent.

Not only is this meddling in business decisions, it also could hit small farms very hard as only those below 3 hectares are excluded. Member states with many small arable farms may have something to say about this.

In the meantime the Commission really needs to send this proposal back to its Daft Ideas Department and return to the drawing board.

The last one left standing

Last week East Malling Research kindly invited me to give the annual Amos Memorial Lecture at the research station. My theme was 'Food: Safe, Sustainable, Sufficient?' They videoed the lecture so I will post a link if it becomes available, not that I can see it going viral.

I was able to have a short tour of the station which is effectively the last horticultural research station we have in England. As the Applied Crops Research Centre, what was Warwick HRI is doing its best, but it is a shadow of its former self. There are a few post-1992 universities who do some work, but they lack economies of scale and the concentration of different kinds of expertise which allows people to bring together various forms of knowledge to solve problems.

East Malling is fortunate in the sense that its land is owned by a trust which gives it security of tenure and provides it with some income. Its centenary is approaching and an appeal for a new laboratory is to be launched.

Applied research involves identifying the problems faced by growers and farmers and working with them to provide long-term, sustainable solutions. It enables productivity to be improved but in a sustainable way. At East Malling, they are doing important work on water conservation which is going to be one of the biggest challenges for world farming in the decades ahead.

Applied research is a practical way of tackling problems of food security. Diversion of some of the money spent on the CAP for this purpose would yield substantial dividends.

Is Europe losing touch with reality?

Stefan Tangermann

Is Europe losing touch with reality? One might think so given the surprise Greek decision to hold a referendum on the austerity package. The fear of contagion is very real and if the euro is confined to a small core of northern member states, the single market project will be undermined. One of the main justifications for creating the euro was the need to avoid competitive devaluations between member states.

It also ended the nonsense of green money, now largely forgotten, but one of the more bizarre and distorting aspects of the CAP (which is saying something). Somewhere in Brussels we should have a sculpture commemorating the switchover mechanism as an awful warning.

However, it is also a question that leading agricultural economist Stefan Tangermann has posed in relation to the CAP reform proposals announced last month.

The former OECD director for trade and agriculture argues that the reform proposals do not reflect the economic realities that Europe currently finds itself in. It is unfortunate that the policy planning calendar dictates that the European Commission must make vital decisions on the CAP through to 2020 but Tangermann claims the proposals fall short of an adequate response to perhaps the biggest crisis the trading bloc has ever faced.

But he is not alone in his criticism of the reform plans. It appears that dissatisfaction with almost every aspect of the proposals is rife and MEPs were given the opportunity to vent their frustrations at the Special Committee on Agriculture (SCA) meeting in Brussels last week.

In stark contrast to farm commissioner Dacian Cioloş’ assertion that the reform proposals would simplify the various administrative mechanisms within the CAP, MEPs claimed that the European Commission’s proposals for CAP reform are costly, complex and fail to distribute fairly between member states.

Ciolos is in danger of being seen as the least effective farm commissioner since Réne Steichen who was also seen as a trojan horse for France. Like Ciolos, he was educated in France but at the end of the day he turned out to be somewhat less beholden to France than expected.

The European Parliament is also concerned about moves by national governments to cut almost €500 million from CAP spending in 2012 last week. Instead, they re-affirmed their backing for the European Commission’s draft budget plan issued in April, which proposes a 2.3 per cent CAP budget rise within a wider 5.2 per cent year-on-year increase in commitments.

This is, of course, a dangerously nonsensical proposition against the background of serious budget deficits in Europe. If there is a collapse of the eurozone it will look even more so.

'Greening' measures prove controversial

The 'greening' measures proposed in the Commission's CAP reform plans attracted criticism from several countries at last week's Farm Council in Luxembourg.

Defra secretary Caroline Spelman argued that the measures to take 7 per cent of land out of production amounted to a return to set aside. There was too much focus on taking measures in Pillar 1 rather than proven approaches in Pillar 2: Pillars

The Commission maintains that the measures are aimed at marginal land, but it does seem to be a rather blunt policy instrument. Having said that, not everything done in Pillar 2 has been cost effective by any means.

CAP reform proposals have no friends

The Commission's proposals for the reform of the CAP have not gone down well in any quarter and have managed to draw fire from Britain and France: Reform

Of course, it was ever thus and one is never going to devise a reform that is welcomed in all quarters. However, Franz Fischler as commissioner had a new vision for the CAP which was more adjusted to contemporary realities. He also showed great subtlety in the tactics that he used to secure some real changes in the CAP, albeit that much was left to be done.

One suspects with the present reform that it very much 'business as usual' with some greening at the edges. It is far from clear that the 'greening' element has been well designed and will actually achieve its aims and here the French have a point.

Similarly, the capping of payments has a populist appeal as it seems to target 'fat cat' farmers, but once again it reflects the confusion and uncertainty that surrounds what the real objectives of the CAP are. Is it a social policy, is it about food security or is it about a competitive and efficient agriculture? One doubts whether it is about the last objective.

No great suprises in CAP reform proposals

There are no great surprises in the widely leaked Commission proposals for reform of the Common Agricultural Policy released today: CAP reform

Also, not surprisingly, UK ministers have criticised the proposals as inadequate.

The reform proposals have been overshadowed by the eurozone crisis which has understandably been dominating the EU agenda and media discussion. Its outcome will shape the future of the EU.

However, whatever shape the future eurzone takes, it is likely that budgetary pressures will ultimately play a substantial part in influencing the outcome of the CAP reform discussions.

CAP reforms 'turning clock back'

Farm minister Jim Paice has luanched an outspoken attack on farm commissioner Dacian Ciolos, accusing him of 'turning the clock back' in his proposals for CAP reform.

Paice was addressing a fringe meeting at the Conservative Party conference. He hinted at disappointment that the efforts that he and secretary of state Caroline Spelman had made to build relationships in Europe had not paid off.

Read more here: CAP reform

Dual blast on CAP from Court of Auditors

The Court of Auditors has delivered a dual blast at the CAP. The first report considers the £2.5bn of spending a year on agri-environmental schemes. It argues that poor design makes it difficult to assess the extent to which agri-environmental schemes achieve their goals: Agri-environmental

The Court found that objectives set by the member states were numerous and not specific enough for assessing whether or not they have been achieved. Although the environmental pressures are identified in rural development programmes, they cannot be easily used to provide a clear justification of agri-environmental payments.

There were considerable problems about the relevance and reliability of management information. In particular, very little information was available on the environmental benefits of agri-environmental payments.

The report is significant given the declared intention to 'green' the CAP in the next stage of reform.

In a report just released the Court has criticised the mechanism used by the European Commission to recover undue payments made under the EU's €55 billion-a-year Common Agricultural Policy (CAP): Recovery

The ECA found that 90 per cent of the amounts listed as recoveries in the EU's annual accounts represented reimbursements from national budgets rather than actual recoveries from CAP beneficiaries. Its report says that while this approach protects the financial interests of the EU, it diminishes the deterrent effect of recovery from beneficiaries.

Following an earlier report in 2004, changes implemented in 2006 had improved matters by providing more accurate information and greater detail on debts and recoveries at member state level. However, the system had certain shortcomings such as running the risk of encouraging the write-off of debt as early possible or reporting debt as late as possible.

There were also, not surprisingly, variations in the conduct of member states. This meant that debts were recognised at different times, reported figures were not comparable, interest was applied inconsistently and the point in time at which debts could be witten off varied significantly. All of this had a negative financial impact on the EU budget.

OECD calls for farm subsidies to go

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

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

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

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

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

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

Sugar quotas to go

The EU is to end sugar quotas and guaranteed minimum prices in 2016. This represents a one year extension after the scheduled end to quotas to give producers more time to adjust: Sugar

It is hoped that the change will boost output and reduce prices by as much as 8.2 per cent. It will also align the EU more closely with world markets, boosting exports and reducing imports.

It has a taken a long time to reform the sugar regime, but this is another step towards a more market oriented system.

Greening element in CAP reform increased

The European Commission is proposing to increase the greening element in the CAP reform in relation to Pillar 1 measures: Greening

The proportion of farmland to be placed in ecological measures would be increased from the previously proposed 5 per cent to 7 per cent. Such features include fallow terraces, landscape features, buffer strips and afforested areas.

It is also proposed that farmers should grow a third arable crop covering at least five per cent of their farmed area. This seems to be an intervention in commercial judgments by the farmer which may not bring commensurate environmental benefits despite concerns about monocultures.

Needless to say, farming unions are not happy with these proposals which they are presenting as a threat to food security.

Farm incomes up

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

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

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

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

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

Farm subsidies face cut in US

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

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

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

Birdlife International critique greening delivery mechanisms

Birdlife International have understandably welcomed the Commission's stated intention to devote 30 per cent of Pillar 1 funding to 'greening' the CAP. They think that it could make a real difference in terms of the delivery of public goods by the CAP.

However, as always the devil is in the detail and they think that some of the proposed policy instruments are not fit for purpose. Indeed, on a scorecard they fail six of the twelve and give an 'unclear' rating to the other six.

Read their report here: Birdlife

Defra tries to revive reform coalition

Defra is trying to revive a coalition of support for radical reform of the CAP, holding meetings with Sweden and Denmark: Reform

Of course any coalition would need a broader base of support. In the past the Netherlands has joined in and at one time a particular political conjunction in Italy which no longer exists attracted their support. Liberally oriented former Communist states might also be supporters, but they will be hoping to get higher payments out of any settlement.

In any case the real obstacle to reform is the determination of France to maintain subsidy and protection. It usually has the support of Germany as part of broader political trade offs.

Of course, if the eurozone crisis deepens, as it threatens to, all bets may be off.

Storm of protest greets 'capping' plans

A storm of protest from farmers and their representatives has greeted the leak of European Commission plans to cap Single Farm Payments (SFPs) to large farms. The proposals should have come as no surprise as the Commission sets out to meet imperatives to cut the CAP budget and make it superficially fairer. However, critics say that the move undermines the international competitiveness of EU agricultire.

Under the leaked proposals individual farmers receiving above €150,000 (£132,000) in payments would lose 20 per cent of that support with the amount increasing proportionately for those raising larger sums. There would be an overall limit of €300,000.

The cutbacks would not apply to the so-called 'greening' element of Pillar 1. They would also take account of farms with large workforces through a so-called 'salaried labour intensity' indicator. However, most large farms are relatively capital intensive and make extensive use of contractors who presumably would not count.

The Commission intends to introduce legislation to close a loophole that might be available to farmers by splitting up their holdings into separate legal entities or transferring payments to relatives. Some of them may have already done this or still have a period of grace to do so.

In a sense this is a shift in the direction of confirming that the CAP is essentially a social policy for marginal farmers. Competitiveness is a formal objective, but has always been given relatively little attention.

Not so sweet?

Warwick University's Ben Richardson takes a look at sustainability issues surounding the sugar industry: Sugar

What does the budget mean?

Sophia Davidova, president of the Agricultural Economics Society, offers her assessment (reproduced from the AES Newsletter):

The Communication from the European Commission on the budget for Europe 2020 is now in the public domain. Does it answer questions such as: whether the CAP budget will be consistent with the vision for future CAP developments; will the direction taken in previous CAP reforms for incremental increases in the funding of Pillar 2 be maintained or there will be a U-turn to what I call a ‘counter-modulation' towards transferring funds from Pillar 2 to Pillar 1; and to what extent will the CAP budget be maintained in real terms? These questions directly target the core justification for the CAP. But if there is no strengthening of Pillar 2, this may undermine the public value of CAP expenditure as a response to the priorities of the European citizens for ecosystem services and rural development.

The budget for the CAP for 2014-20 in 2011 prices is €372 bn, plus €15bn for research and innovation. Year on year the budget for ‘Sustainable Growth: natural resources' will decrease in real terms - by 10% from 2014 to 2020. On the other hand, expenditure on ‘Smart and inclusive growth' (including competitiveness and cohesion) will increase by 17.7%. The allocations plainly assume 2% annual inflation to maintain the budget for both Pillars 1 and 2 constant in nominal terms. The decline in the share of the total budget taken by total CAP expenditure will continue, reaching 33% in 2020 (from 39% in 2014).

It is difficult to say if this budget is a victory for the supporters of CAP and in particular Pillar 2, which recent rumours preceding the decision suggested. However, the lack of political will to rebalance funds in favour of Pillar 2 means that the EU will hardly be able to tackle the enormous rural and agri-environmental tasks ahead - unless we believe that mandatory Greening of Pillar 1 will deliver significant environmental public goods.

The budget could not be anything else than a compromise with such divergent interests amongst the EU-27. Many Member States, not just the UK, have criticised it as too generous. There will be debates on the own resource proposals, and what happens to the adjustments and rebates. It is also worth remembering that there are disagreements on the CAP budget even within the UK between government departments, and between DEFRA and the devolved administrations. Although a compromise, there is no certainty that these are the budgetary outlays that will be decided and implemented, since the European Parliament and the Council will have their say on the Commission communication. Thus, the uncertainty continues.

Real term cuts in CAP budget

Now that more information is becoming available about the CAP budget 'freeeze', it is evident that what is really envisaged are real term cuts. The envelope for the CAP post 2013 is €371.7bn in 2011 constant figures (€281.8bn of that is first pillar and €89.9bn second pillar). This compares to €417bn in the current financial perspectives. There is yet much to be decided in terms of how policy will be revised in the light of these budgetary constraints.

A system of 'reverse modulation' was envisaged whereby money could be shifted back from the second to the first pillar, but after protests by environmental lobby groups this was axed at the last minute. 30 per cent of direct support will be made contingent on adhering to greening measures that go beyond current cross-compliance requirements.

There will be a slow convergence process to address the differences in direct payments received by member states, i.e., those that have will not see it disappear immediately. The long-term aim is to ensure that all member states reach 90 per cent of the EU average, but significantly this will take account of differences in wage levels and input costs. The main beneficiaries of this approach are likely to be the Baltic States, Portugal and Romania. Poland and Bulgaria will gain only marginally.

There has been some backing down on the capping of support to major agricultural holdings which will now take account of the 'economies of scale of larger structures and the direct employment these structures generate.' How these might be measured could in itself be controversial. Any savings would be retained in national envelopes and recycled into budgetary allocations for rural development, but influential, large-scale farmers will still lobby hard on this topic.

Environmental groups took the view that the proposed measures did not represent effective steps towards ecological sustainability and a green economy.

Farmers' unions accept CAP budget proposals

Although they are concerned about particular aspects of the CAP budget proposals, such as the flexibility to transfer funds between the two pillars, farmers leaders are unsurprisingly generally satisfied with the deal against a background of fiscal austerity: Budget

Not surprisingly, farming organisations want to claim some of the credit, but much of it must go to France for a resolute defence of what it sees as its interests. It helps if the farm commissioner has strong French links and understands the French point of view.

Equally, the RSPB, as a leading spokesperson for conservation interests, is less happy. C'est la vie.

China goes nutty

World supply and demand patterns for food are being affected by the development of a prosperous middle class, not least in China. Such developments provide challenges, but also opportunities for food producers and exporters. Moreover, in a market economy, production substitution can occur.

In China an appetite for healthier living has stoked demand for nuts, sending prices of cashews and other snacks to record levels. The trading price for cashew kernels is up more than 60 per cent from a year ago, walnuts are up 43 per cent and pecan kernels are up 38 per cent.

The Chinese have always enjoyed nuts, but the recent boom reflects a growing awareness of their health benefits. They are rich in vitamin E, oils and proteins. Walnuts are considered good for the kidney and the brain. In a country where traditional forms of medicine remain strong, recent news reports that pistachios prevent prostate cancer has triggered a rush for the nuts.

China used to be a net exporter of walnuts but is now a net importer. Imports from California doubled last year, making a small dent in the US trade deficit. Product substiution seems likely to occur with almonds, which are cheaper than most nuts, taking the place of cashews.

One must not forget that large portions of the Chinese population have Global South levels of income. On a per capita basis Chinese consumption remains low compared with developed countries but for nuts and other foods this will continue to change as the Chinese economy grows.

As far as the CAP is concerned, I must confess that I have forgotten how the support regime for nuts works. It just shows how much detail and complexity there is in the policy. I do know, however, that the Court of Auditors has criticised over payments in Spain and Greece.

Initial win for France

France has won the first round of the CAP budget negotiations with the Commission recommending that the farm budget should be frozen in real terms up to 2020, although additional provision would be made for the accession of Croatia and a €500m 'crisis intervention fund': Budget

Of course this is only the first stage in a long battle. The budget plans also assume a 5 per cent increase in the overall budget at a time of fiscal austerity and the UK has made it clear that it will oppose this increase. If it went ahead it would shrink the CAP share of the budget from 45 per cent to 38 per cent despite the total farm envelope being protected.

This budget recommendation might seem to confirm the view that French educated farm commissioner Dacian Ciolos is in the pocket of Paris. NFU president Peter Kendall recently criticised him for favouring a bucolic view of the countryside that promoted small, traditional farms (which are numerous in Romania) Mr Kendall said that Mr Ciolos had taken a 'Lark Rise to Candelford' view of agriculture which was old fashioned and shunned development.

There are concerns that the complexity of the changes proposed for the CAP and the delays which result from co-decision mean that any new package will not be brought into place by the target date of 1 January 2014. It might have to be delayed for one year.

It has become increasingly evident that the CAP in its current form will outlive me but I wonder if it will also outlive my granddaughter who starts secondary school in September.

Why lack of data affects food prices

One of the outcomes of the G20 food summit last week was an agreement to create a global database in an effort to better measure the level of supply, consumption and inventories of staple foods.

There is a justifiable view that insufficient information is contributing to volatilty in food markets. A price spike in 2007-8 was triggered by a fears of a shortage leading to bans on overseas sales and the hoarding of supplies. However, when better data became available, it was evident that fears of a shortage were misplace.

Outside the US little is known about the true state of supply, demand and inventories of staples. China, Russia and India are unwilling to share information with others about stocks in particular because they fear they could lose control over prices. Indeed, in China, such information is regarded as a state secret.

An earlier G8 initiative on oil markets is still struggling ten years after it was initiated. The agriculture market information system (Amis) has insufficient resources with the project based at the cash-strapped Food and Agriculture Organisation of the UN.

It's a good idea which should enable markets to work better but whether it can be really effective remains to be seen.

Sarko's regulation crusade makes modest progress

President Sarkozy of France has been on a crusade to regulate agricultural commodity markets and he made modest progress at a two-day G20 conference in Paris last week. France made food security and commodity regulation a centrepiece of its G20 presidency after the 2007-8 food crisis and the rise of more than a third in global food prices over the last year.

France was able to secure a diluted deal to recommend that G20 finance ministers tackle the regulation of financial commodities markets. The communiqué agreed at the end of the Paris summit echoes an earlier deal by finance ministers to study limiting the number of contracts speculators can hold.

However, some argue that commodity markets bring a much needed liquidity to the farm sector. Last week the World Bank took the rare step of encouraging developing countries to buy insurance in the derivatives market against sudden changes in food prices with a deal that would allow the nations to hedge some $4bn worth of commodities.

The World Bank has struck a deal with investment bank JPMorgan who would offer simplified hedging instruments to the private sectors of developing nations, including farming co-operatives and food processing companies. The World Bank would underwrte $200m in credit risks while JPMorgan will take on a similar amount. It is anticipated that other banks will join later. Some critics would, of course, just see this as evidence that the World Bank is hand in glove with global capitalism.

The real problem with the G20 summit is that it backed away from action on biofuels and export bans. The subsidised encouragement of biofuels has boosted food prices. Marie Brill of ActionAid said it was a shame that the G20 had ignored a clear recommendation in a commissioned report from international groups to remove subsidies and mandates for biofuels. There are, of course, powerful interests in the US in particular linked to biofuels which are seen as a means of underpinning American energy security.

On exports, a report from the World Bank and the UN's Food and Agriculture Organisation said that 'export subsidies by major food exporters had strong destabilising effects on international markets' and recommended that the G20 use them as a last resort.

Threat to biodiversity funds

The RSPB and Defra are concerned about a potential threat to funds paid under Pillar 2 of the CAP to support biodiversity and wildlife schemes: Biodiversity

It would be very unfortunate to say the least if savings in the CAP budget were made by capping payments that compensate for the provision of positive externalities for which there is the strongest case for public subsidy.

The bulk of any reductions should come from the SFP, although the concern here is that an attempt will be made to penalise efficient and competitive farms by capping payments. MEPs have been urged to vote against these proposals: Capping

A risk management toolkit?

Farming as an activity is highly exposed to risk, in large part because of natural factors such as variable and unpredictable weather which are beyond the control of farmers even with modern agronomy and technology and a more knowledge intensive agriculture

As part of CAP reform the Commission has suggested the creation of a 'risk management toolkit' as part of the Rural Development Measures under Pollar 2. National governments of the member states might be given the option of choosing from a menu of options and receive co-financing from Brussels subject to an upper limit. One proposal is some kind of income safety net constructed in a way that is WTO compatible.

Stefan Tangermann is a highly respected agricultural economist who served as head of the agriculture and food division at OECD. He has produced an analytical paper on the subject of risk management and the future of the CAP: Risk management

Justifying farm subsidies

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

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

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

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

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

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

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

France uses E.coli scare to boost CAP

France's agriculture minister Bruno Le Maire has used the E.Coli outbreak in Germany to defend spending on the CAP. Pointing out that 17 people had died, he commented, 'I too would like us to be able to cut the budget [Really?], but we will have to explain to consumers that we will also have to cut back the sanitary controls that are partly paid for the common agricultural policy ... at a time when we are facing a big sanitary crisis.'

Mr Le Maire, who may become finance minister of Christine Lagarde goes to the IMF, called on member states to make a 'courageous and responsible decision' in negotiations over the budget for the CAP after 2013. In other words, minimal cuts.

This really is a presposterous and obnoxious piece of shroud waving. It would be perfectly possible to decide to maintain sanitary and phytosanitary spending whilst reducing the SFP.

Who compensates farmers and to what extent for the economic consequences of the E.coli scare remains to be seen. The amount available from the CAP has been topped up, but the question is how much cash strapped member state governments can afford, not least in Spain.

The German agriculture minister does not come out of this well. First, Germany went in to 'Club Med' mode, blaming it all on poor Spanish hygiene. Subsequently they have been unable to definitively identify the source of the outbreak.

MEPs side with Commission

MEPs on the Agriculture Committee have sided with the Commission over the question of scaling farm payments so that bigger farms receive less: Scaling .

Such an idea has always been unpalatable to Britain, Germany and the Czech Republic which have a disproportionate share of larger farms. It was rejected by the Farm Council earlier this year, but farm commissioner Dacian Ciolos has continued to favour it. It has never been clear how practical it is, given that a farming business could be constituted as single different legal entities.

The MEPs assumed that the farm budget will remain the same as it is now. The CAP has some stout defenders but in a time of austerity and with many competing uses for the available funds, it is difficult to see some cutback being avoided. The MEPs also favoured the 'greening' of the policy but it is often Pillar 2 schemes that suffer when the budget has to be cut.

Of course, cutting back payments to larger farms would give some headway in the budget, but not that much. Underlying all this is the perpetual muddle about what the priority ordering of CAP objectives is, but in practice fostering an efficient and competitive European agriculture (which is what most larger farms do) often loses out.

Disciplining agricultural support

The WTO may have rules in place to discipline domestic agricultural support, but in practice this is quite difficult given the propensity of countries to evade or fail to fully implement the rules given what they perceive as being their national interests. Three leading agricultural economists have produced a report on the subject which covers four developed countries (including the US, EU and Japan) and four developing countries (including India and China). It can be found here: Agricultural support

The report raises the question of the legitimacy of green box support which has been discussed on this page before. It notes that this has been treated as 'decoupled income support by the United States, the European Union, and China. There are large differences in the levels of such payments. The extent to which decoupled income support affects production remains uncertain but may be consequential. Limits might therefore be envisioned for this type of support to achieve a balanced set of future commitments.'

The EU has always taken the view that the SFP can be protected by putting it in the Green Box, but is always possible that this might be challenged in the WTO's Dispute Settlement Mechanism - although this would incur political costs for the country concerned.

Is a radical approach to CAP reform off the agenda?

In the latest issue of Eurochoices the editor John Davis suggests that 'Those who favour a more radical approach to policy development [in the CAP] may now be considered "outliers".' He notes that CAP reform has followed an evolutionary path, which is certainly the case, and that as a consequence the Producer Support Estimate (PSE) has been reduced from around 35 per cent in the late 1990s to about 24 per cent in 2009 which is close to the OECD average (although the US figure is 10 per cent).

Of course, in the absence of any radical impetus, we may not progress much further. Those who take a relatively radical position may help to produce compromise positions which still lead to real progress on reform.

It is interesting that elsewhere in the issue an article by David Harvey and Attila Jambor point out the flaws in the conception that Single Farm Payments should now be interpreted as payments for public goods.

They note, 'In fact, these payments derive from and largely reflect previous coupled and production related support. They are a supplement to production-related market returns, and are treated as such by farmers.' As for cross-compliance it is 'often regarded as an unnecessary and irritating condition attached to deserved support for commercial farming.'

Commission insists on transparency

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

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

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

Defra no longer in charge of CAP reform

The NFU's policy director Martin Haworth thinks that UK policy on CAP reform is no longer being driven by DEFRA. Rather the Treasury and the Home Office is in charge. Their priority is seen as being to protect the British rebate rather than British agriculture. The NFU is fighting to ensure that any deal to protect the rebate does not come at the expense of agreeing to cuts in farm support.

The NFU has been forced to give up its opposition to any 'greening' of Pillar One support and has accepted that CAP reform is likely to impose further environmental conditions on subsidy payments. The emphasis now is on ensuring that any measures are fair and achievable.

The NFU clearly considers that its stance has been undermined by that of the Country Land and Business Association (CLA) which has advocated ranking environmental mesures alongside food security in importance. NFU president Peter Kendall has described the CLA's stance as a 'noose around our neck' in the negotiations. It had made it easier for policy makers to argue that subsidy payments should be shifted from food production to the environment.

What impact will co-decision have on CAP reform?

In an interetsing paper presented at the Agricultural Economics Society conference at Warwick University last week, Alan Greer and Tom Hind explored the possible impact of the introduction of the co-decision on CAP decision-making and reform prospects. They proceeded by setting out four scenarios:

Scenario 1 The 'conventional' view (often put forward in the media) in which the EP gains power at the expense of other institutions (assuming that there are significant points of difference).

There are two limiting factors on the ability of the EP to exercise power. First, as the lead committee ComAGRI has had very limited experience of co-decision and it has to develop positions that can command majority support across the Parliament. If its views are too close to those of the agricultural community (and the committee is more agriculturally focused than in the past), it could be challenged in the plenary, especially on environmental issues. Second, the Parliament has limited resources relative to the other institutions: the total staff of ComAGRI is around 15, plus three seconded researchers.

Scenario 2 The Council-EP axis in which the Council of Agriculture Ministers will use its expertise to work in close partnership with the EP to shape the legislation proposed by the Commission, weakening the latter. This depends on member states being able to work closely with national MEPs and the presenters argued (rightly in my view) that this scenario was not likely to develop in the next few years.

Scenario 3 The Commission-centric scenario in which the EP's resource void is filled by the Commission. The Commission would use its expertise and resources to work with the EP, using ithe role of arbitrator to facilitate agreement between the EP against the Council in order to shape the final outcome more closely to its preferences. The paper authors thought that this was the most likely scenario. The Commission had increased its displacement as a result of enlargement.

Scenario 4 'Co-indecision'. Co-decision might actually make decision-making more difficult. An average co-decision dossier takes 36 months to process. Some participants in the audience thought that this was the most likely scenario.

If that is the case, it does not bode well for reform. But any of the scenarios is likely to make the reform process more complex, slower and less radical.

'Greening' of CAP on its way

Both Defra and the NFU think that they have lost the battle to prevent the 'greening' of the CAP: Greening .

The NFU is concerned about the impact of the proposed measures on competitiveness, but it looks as if farmers will have to comply with environmental requirements to claim their Single Farm Payment. The NFU is consequently going to re-think its tactics on this aspect of the negotiations.

The NFU also thinks that delays in putting forward formal Commission proposals means that the start of the new policy will be delayed until January with the existing policy rolled over for one more year.

Farmers' fuel tax break under threat

The concession which provides farmers with 'red' diesel at a lower rate of duty are under threat. The diesel is coloured red so that checks can see if it is being used illegally off farm.

Draft plans by the European Commission say that current EU rules that allow member states to apply a zero rate of taxation on energy used for agricultural purposes should be repealed. The objective is to allow EU tax policy to contribute to 'green growth'.

The document argues that agriculture is one of the important sectors left out of the EU's Emissions Trading Scheme. The proposal says that a carbon tax of about £20/t should be introduced to bring agriculture in line with other sectors of the economy. It also calls for an energy consumption tax.

The news has been greeted with dismay by farming organisations at a time when oil prices have been rising. The duty rate on red diesel has increased nearly fourfold over the past decade. Farmers were paying an average of 63p a litre for red diesel in February, up from 46.9p in February 2010. This still compares very well with the price paid by hauliers and motorists.

Times have changed

As farm commissioner Franz Fischler pushed through a reform of the CAP against resistance from member states. However, in an interview with Agra Focus he indicates that in the changed environment of co-decision such a strategy is no longer feasible.

Asked whether the plans put forward by current Commissioner Dacian Ciolos went far enough, Fischler commented that the plans were rather vague and went on to say, 'I accept that under the new circumstances, under the way decisions will be made in the EU with the co-decision procedure, one cannot do what we have done in the past - that is to say come forward with a big surprise, a big reform, where everybody is against this reform at the beginning. This doesn't work anymore so one has to find a different approach and in principle I think the approach of Ciolos is the right one, but how far can you go?'

Fischler is a candidate for the post of director general of the UN Food and Agriculture Organization which is perhaps not as influential as it once was and needs a strong hand at the helm to revive it.

Complete Doha Round demand reform states

The prime ministers of the nine of the more reform oriented states have called on the EU to do it all it can to conclude the Doha Round in 2011 which they term a 'make or break year'. The letter, entitled Getting Europe Growing is signed by the leaders of the UK, the Netherlands, Sweden and Denmark, the leading lights of the traditional reform bloc. They are joined by the Baltic states, Poland and Finland. The absence of any southern member states is significant.

WTO trade rounds have been the most effective driver for reform of the CAP because they provide an exogenous pressure which helps to overcome internal obstacles. Manufacturing and service industry interests exert pressure when they see an agreement with benefits for them jeopradised by a failure to agree on agriculture. This is what happened in the concluding phase of the Uruguay Round.

Unfortunately for the hopes of reformers the political context has changed. The current administration in the US has not given a higher priority to trade policy and is preoccupied with coming up with a political deal that can provide an agreement on the budget. The political pressure for greater liberalisation that came in the past from agribusiness interests has weakened.

Even if the US and the EU could agree on the outlines of a deal they can no longer impose it on the other participants with some side payments. Emerging countries have become powerful players and while liberalisation suits Brazil's interests, India and China want to protect their peasant populations.