China's new line on corn imports could affect world market

Changes in supply and demand patterns for food in China can have important implications for world markets. Even a small increase in Chinese imports can influence world markets in which there is a tight balance between supply and demand, as well as offering new export opportunities for farmers. Many of these decisions are politically determined and there appears to be a significant change in the line of the central authorities on corn (maize) imports recently.

Since 2001 when China lowered its import barriers, a policy of self-sufficiency has been followed in relation to corn, rice and wheat with imports kept to a minimum. In contrast the soyabean market was opened up to imports to release land for the key staples. China has become the world's largest importer of the oilseed, representing 75 per cent of global seaborne trade.

Last year China's agriculture minister Han Changfu said that corn 'should not become the second soyabean.' Recently, he has modified his line, saying that corn imports would have to increase gradually to meet demand for animal feed which in turn reflects growing prosperity and higher levels of meat consumption. It appears that China envisages importing 20-30m tonnes of corn a year, the lower figure representing 10 per cent of consumption. While China's grain output is at record levels, there are evident strains with urbanisation using up farmland and problems with water supplies.

China does not want to be solely dependent on the US and is encouraging exports from Argentina and the Ukraine.

Finance for farmers

Back in the 1990s I was involved in a research project led by Will Coleman from Canada which looked at how farmers got their finance. I interviewed all the clearing banks in Britain and Ireland, plus a specialist institution called the Agricultural Mortgage Corporation which was set up by government in the 1920s but by then was being absorbed into the private sector.

The general pattern was for banks to have a specialist agricultural manager at head office who, with local managers, kept in touch with the farming community. Farmers were seen as a very safe bet. They rarely defaulted and, even if they did, you ultimately had the land as an asset, although banks were very reluctant to foreclose. In many ways it was a very traditional form of banking. A relative who is a farmer was tipped off by his bank manager about a suitable farm to buy to diversify his business.

There's still plenty of need for finance for land and capital equipment. Those who inherit a farm sometimes have to buy out siblings. They may also want to buy additional areas of land to secure economies of scale. Finance is important if agriculture is to meet the challenge of increasing and more sophisticated demand and relatively finite supply, particularly of land suitable for farming. Food production will need to rise by at least 60 per cent by 2050 to feed a rapidly growing world population that is increasingly able to demand more resource intensive foods such as meat which create additional demand for animal feed.

However, since the financial crisis banks have been cutting their loan books, while the price of land continues to rise, stimulated by the availability of subsidies, good long-term demand for food, tax breaks and, in parts of the UK, the dual use of farms for sporting purposes. However, new types of finance provider are emerging like Aquila Capital of Hamburg.

Aquila actually buys equity stakes in a farm which could be as much as 70 per cent. However, they claim that it works more like a debt. They receive a guaranteed 3 per cent a year, although there might be circumstances in which the farmer had to borrow to meet this requirement, increasing the debt burden. The farmer receives the next tranche of income and the remainder is split 70-30 in Aquila's favour. It is envisaged that such investments will yield pre-tax, post-free returns of 5-7 per cent a year which are attractive in current circumstances. Savings accounts are typically paying less than 2 per cent and relatively few companies pay dividends above 5 per cent (and may not be able to sustain them). 4 per cent would be a good return on an income fund, although you should be able to get over 5 per cent from a peer lender, depending on how much risk you might be able to take.

Whether it is a good deal for farmers is an interesting question, but needs must. Aquila also claim that after 15 years or so farmers will have accumulated enough capital to buy them out.

The capping controversy

A full and very informative blog post here, although the English is a little stilted in places: Capping

I would just make a couple of points. First, it is always possible that businesses could be split into distinct legal entities to avoid the rules. Second, the last paragraph of the post points out that many wealthy estates benefit from large CAP subsidies.

However, this brings us back to the question of what the CAP is for. If its main objective is to help poor or marginal farmers, it is an inefficient means of doing so. (Actually, there are probably at least two objectives here, one an income distribution objective and one a rural landscapes/depopulation objective).

If one, however, one thinks that the CAP should be helping European farms and food processors to be globally competitive, larger farms are, in general, more efficient (and often more environmentally conscious and aware of animal welfare needs).

Devolution and agriculture

Devolution raises some tricky issues about who can do what and this interesting and informative blog post looks at a dispute involving the Welsh Assembly Government and the Westminster government that has gone to the UK Supreme Court: Devolution

Getting agreement on CAP is near impossible

Reflecting on the outcome of the CAP negotiations, NFU president Peter Kendall is critical of the decision-making process, saying that it is near impossible to reach agreement: Kendall. He makes a good point, but how could one start to change it, given the range of interests and institutions that have a stake in the way decisions are made?

A paradigm shift in CAP?

Gwilym Jones of the European Commission set out a vigorous defence of the CAP reforms at the Westminster Food and Nutrition Forum in London last week. He claimed that they represented a paradigm shift which would re-link farmers and citizens. It put farmers in greater control of their day-to-day economic choices.

Jones claimed that the greening measures were a game changer. They offered measures which protected soil, water and biodiversity (interestingly there was no reference to climate change.

One positive feature that Jones did draw attention to was that all payments to farms would be published, stating 'we have nothing to hide.' It remains to be seen what this move towards transparency means in practice and how accessible and reliable the data turns out to be.

Jones insisted that farming is different, asking what other industry faced exceptional weather events.

Chris Horseman of Agra Europe asked why decoupling had been put into reverse. Jones disagreed that this was the case, arguing that some sectors worked with very severe conditions, for example mountain areas. But this has always been the case and does not justify an extension of coupling.

CAP reform a dress rehearsal?

The CAP reform could simply be a dress rehearsal for a further reform, suggested David Baldock of the Institute for European Environmental Policy at a seminar of the Westminster Food and Nutrition Forum in London last week. The reform could serve as a means of showing which issues we had to get serious about. The reform had been a rush, it didn't have a finished feel about it. This was a widespread perception in Europe. What was needed was a credible mid-term review.

What was good about the reform was that the public goods idea survived in the CAP. It also couldn't be a one size fits all policy. On the downside, there had been a loss of the commitment to transparency and simplicity. There was a theoretical possibility of reverse modulation.

On the greening measures, it was quite difficult to see what was going to change on permanent pastures. The Ecological Focus Areas had changed greatly from original proposal. The idea covered much less than had been originally envisaged. Cross-compliance entailed a softening of the regime in some directions. Protecting carbon rich soils, the most innovative idea, had been lost.

The last Mid-Term Review was in the Fischler reforms and, as Baldock noted, the then Commissioner had created a platform and had worked to create relationships with heads of government and ministers. My question would be whether anyone around today possesses Fischler's adroit skills.

Challenges remain for Lithuanian presidency

EU agriculture ministers will meet in Brussels for the first time under the Lithuanian Presidency on Monday (July 15) and for the first time since an agreement on most aspects of CAP reform for 2014-2020 was reached by the EU institutions, reports Agra Europe. Vilnius began work on July 1, after being passed the torch by Dublin, who garnered wide praise after largely concluding the CAP reform package. But the Lithuanian Presidency, in it’s maiden term in the position, will have to oversee certain parts of the reform that were still up for debate when the deal was reached last month.

As part of their mandate, the new presidency will need to seek progress on the remaining issues left out of the reform agreement, which include the ‘degressivity’ proposal, co-financing and rural development. They will need to seek a compromise with Parliament, which is irked by the Council’s resistance to negotiate on the positions taken by heads of government on the 2014-2020 ‘multiannual financial framework’ (MFF). MEPs maintain that it is their legal right to have an equal say under the Lisbon Treaty.

Lithuania continues to affirm that member states will not be willing to re-open negotiations on CAP reform with respect to the recently approved budget. Monday’s meeting of EU agriculture leaders should shed some light on what, if anything, the Council is willing to do to appease MEPs, Agra Europe predicts.

What is the CAP for?

I give my views here: What is the CAP for? The editor has put in some helpful links.

Why no capping?

George Monibot complains in The Guardian about the absence of capping or degressivity in the CAP reform deal: Monibot

The reason Britain and Germany opposed these proposals is that they have a lot of large farmers and agreeing to capping would disadvantage them and cut national receipts from the CAP. The more fundamental issue is whether the CAP is there to support the global competitiveness of EU agriculture or is meant to be a social policy for marginal farmers.

EU backs away from commodity speculation controls

It look as if the EU is going to back away from imposing limits on commodity speculation. Of course, not all commodities are agricultural, but according to consultancy ETFGI there are 111 agriculture-focused products with €2.8bn of assets. Within exchange traded funds about 30 per cent or $55.5bn of these assets include agricultural investments, according to data from Somo, the centre for research on multinational corporations.

Critics argue that current trading practices help to boost food price volatility. There is no proof that this is the case, but many believe that excessive trading in derivatives can accelerate bubbles and create heavy price peaks which disadvantage the individual consumer. The US has already adopted position limits for a number of core commodity futures and option contracts, including corn (maize) and wheat.

NGOs had been hoping that position limits would be imposed on commodities speculation under the EU's revised Markets in Financial Instruments Directive (Mifid II). Such limits would restrict the activities of fund management companies that continue to engage in soft commodity trading, a number having pulled out earlier in the year. Reputational damage was a major motive for quitting speculative trading.

However, the European Council wants to allow individual member states to set their own position limits. Christine Haigh of the World Development Movement argues that this would pit member states against each other in a race to the bottom. The UK and France are thought to be the most likely to put lenient position limits in place to allow current trading practice to continue as normal.

The Commission and Parliament continue to favour Europe-wide rules, so it remains to be seen what emerges from the trilogue process with a final decision expected by March 2014.

CAP reform deal struck

A deal has been struck in the trilogue process on CAP reform: Done deal. It has been made possible by passing some of the thorniest issues on to heads of government. There has also been a considerable watering down of the original greening proposals which were supposed to be the motif of this particular reform. The National Trust criticised the deal as a backward step: National Trust

NFU president Peter Kendall argued that the deal granted individual countries too much flexibility. It would result in a CAP that was less common, less market-oriented and more complicated. Of course, one of his concerns is that within England the Government will go for more market oriented policies while subsidies are enhanced elsewhere, leading to the absence of a level playing field.

One colleague said that she would now have to change her lecture on the CAP. She won't have to change that much.

Progress made on CAP reform deal

As is so often the case, these things go down to the wire, but it looks as if real progress is being made at last on a CAP reform deal. European Union farm ministers reached a revised negotiating position as the clock struck midnight on Tuesday, raising hopes that a new common agricultural policy will be agreed on Wednesday as talks moved to Brussels, reports Reuters.

'We now have a clear updated mandate ... There's lots of momentum here,' said Irish farm minister and Council chair Simon Coveney following two days of negotiations in Luxembourg.

However, Coveney admitted 'There are some difficult issues to resolve. I am not predicting it is going to be easy. It is not.' Issues that still need to be resolved include the deadline for abolishing EU sugar production quotas, which are blamed for pushing up domestic prices and limiting European sugar exports.

A key sticking point in talks could also be who makes the key decisions on issues such as market intervention, with the European Parliament wanting an increased role, something which ministers have been reluctant to accept. Coveney said no member state voted against the revised mandate, but Britain and Germany abstained on the European Parliament issue. Co-decision has already made it more difficult to achieve agreement.

Parallels between Thai rice policy and the CAP

This interesting article by a former PhD student of mine looks at rice policy in Thailand and sees certain parallels with the CAP: Thai rice policy

CAP reform process hits new snags

Despite the relatively optimistic mood at the recent 'informal' Farm Council in Dublin, the CAP reform process has hit new snags which suggest that a deal may not be reached under the Irish presidency.It appears that a resolution to the EU’s CAP reform process could be delayed further beyond the end-of-June target date, after the European Parliament threatened to veto any deal over member states’ refusal to budge on certain issues, reports Agra Europe.

Parliament agriculture committee chair Paolo De Castro this week slammed the European Council for its approach to the recent ‘trilogue’ discussions on the issue, claiming their approach goes against the "spirit" of the Lisbon Treaty, which granted MEPs equal say on farm policy under the ‘Ordinary Legislative Procedure’. MEPs want to reach a deal by the end of June – when the Irish Presidency ends and the Lithuanian Presidency begins – but this will not happen unless all subjects are up for negotiation and the Parliament's views are heard, De Castro stressed in an impassioned speech this week.

De Castro is just the latest agriculture official to express his public frustration at the drawn out negotiations on CAP reform and perhaps calls into question the suitability of the co-decision procedure in reaching an agreement on this policy, something which has concerned me for some time.

Enhanced co-decision making has been defended as injecting greater legitimacy into the EU institutions, as directly elected MEPs should in theory increase the democratic input of European citizens, and thereby lead to improved legislation. But then according to one recent poll, over 50 per cent of British voters do not know they elect members of the European Parliament. In any case the process appears to have been the victim of growing euroscepticism across the bloc, as well as the austerity agendas of certain member states.

The CAP reform process appears to have hit a brick wall and unless there is a dramatic breakthrough at the ‘trilogue’ talks in the next couple of weeks, the Luxembourg Farm Council on June 24/25 – when it was hoped a CAP reform agreement would finally be signed, sealed and delivered – could turn into a damp squib. Some member states have said they may not even bother to turn up.

The GM debate

This continues to rage on with entrenched positions being taken on either side. However, this interesting post argues that we shouldn't treat all GMOs alike and that we now have a good enough knowledge base to make informed judgments: GMOs

UKIP and the CAP

It is perhaps not surprising to learn that their agricultural policy is not particularly coherent and they are clearer about what they are against than what they would replace it with, but here is an interesting account of their policy stance on agricultural matters: UKIP

CAP reform deal not yet sewn up

This week’s Farm Council meeting highlighted more of the divisions that remain on the CAP reform process than many observers, not least the EU Farm Commissioner and Irish Presidency, would have liked, reports Agra Europe. This meeting was significant in that it was the last opportunity for an agreement between EU agriculture ministers prior to what many are billing as the ‘final showdown’ talks at the Luxembourg Farm Council on June 24-25.

The three big points of discussion were over the nature and scope of the new support systems for ‘young’ and ‘small’ farmers under the next CAP, as well as whether or not an ‘active farmer’ provision – aimed at excluding ‘undeserving’ recipients from receiving subsidies through an EU-wide ‘negative’ list that countries could add to – should be mandatory across member states.

The issue of whether young farmers should be given a 'leg up' has proved controversial for the UK. As for undeserving recipients, subsidy transfer arrangements represent a second best solution offering reallocation in an inherently unsatisfactory system in my view. Interestingly, despite the Presidency testing the water for potential compromise agreements on these issues, many governments were steadfast in their opposition in making the first two schemes compulsory to top-up direct payments, while there was also much disagreement over the third provision.

Simon Coveney, the Irish agriculture minister chairing the member state government talks, came away from the Council stating that he was 'reasonably positive' that compromises on the three proposals can be reached with MEPs and the Commission by the end of next month. Commissioner Dacian Ciolos was also confident of a political agreement but at the same time he reiterated his frustration at the reluctance of several ministers to accept a 'common' and compulsory approach for the targeted schemes.

UK farm minister Owen Paterson, who is engaged in his own battle to defend the Defra budget, also said he was optimistic of a deal this week, but there have been whispers that an agreement may not be as cut and dry as is hoped, with measures such as ‘greening’ likely to be major stumbling blocks. Scottish Liberal Democrat MEP George Lyon even suggested that the Irish Presidency may be given additional time to try and get a deal in July.

Although Lithuania will have taken over the EU Presidency for the first time in their history by that time of year, the view is that the Irish will be best-placed to secure an actual CAP reform agreement due to being relatively more experienced in such matters.

Farmers and the EU

Yesterday I spent a very interesting day in Yorkshire talking with a cross-section of farmers. As always, it was good to hear of the ingenuity that farmers deploy in diversification such as an upland sheep farmer who was producing honey using the summer heather crop, a bit hit with consumers. Another interesting point to come out of the discussion was that many farmers, perhaps egged on by banks, had gone for increasing the area of their farms and had not thought enough about how they could improve productivity on existing land, e.g., by grassland improvement which could yield gains of 50 to 100 per cent.

Many different topics came up, the availability of plant protection products being a particular concern, but among other things we discussed Britain's membership of the EU. There was concern about EU regulations, particularly from the poultry sector, in terms of whether they prevented British farmers from enjoying a level playing field in terms of competition.

When I said 'many' farmers could not survive without the single farm payment, I was corrected by the word 'all'. If this is the case, it is worrying in terms of the viability of British farming. But I accept that the availability of the SFP is built into business models and can make the difference between profit and loss. An arable farmer did emphasise that most farmers would prefer to earn a living from the market if they could get a fair price and this led us into a discussion of the economic power of the supermarkets.

It is quite likely that we will have a referendum on Britain's continued membership of the EU: Labour would be disadvantaged at the next general election if it was unable to offer this. It is also quite likely that the vote would be to withdraw. In terms of the single market, a lot would then depend on whether a satisfactory association agreement could be concluded with the EU. European countries have an incentive to do so given the exports they make to the UK, but the devil would be in the detail.

But what would happen to farm subsidies? It would be an opportunity to think again about what the objectives of such subsidies should be, and also to reduce them. One of the problems with EU policy has been that the objectives in the Treaty of Rome were contradictory, had no preference ordering (although one appeared in practice) and were never changed in treaty revisions (too much of a hot potato).

What could be done is to pay farmers a tapering percentage of their historic SFP, say 90 per cent in the year after exit and 80 per cent in the second year while there was a serious conversation about what sorts of subsidies were needed, for what purpose and how they could be reduced over time. Indeed, farmers could be offered a buy out of their subsidies through a bond scheme.

Greening remains big issue in CAP talks

The general feeling from last week’s Farm Council and subsequent ComAgri meeting was that there needs to be more compromise from all sides in the forthcoming trilogue talks between the European Commission, Parliament and Council if they are to get the job done at the June 24-25 Farm Council as planned, reports Agra Europe

‘Greening’ remains one of the key talking points, with environmental groups again urging decision-makers not to ‘green-wash’ the CAP earlier this week, but many MEPs are still wary of the ‘double payment’ quandary should 30% of Pillar Two direct payments be linked to these measures.

Greening itself has not yet been tackled in the trilogues, yet EU Farm Commissioner Ciolos reiterated last week that an ‘equivalence’ system must be 'credible' and 'avoid double funding'. The measures must be 'clearly defined' and constitute a 'clear baseline' for Pillar Two agri-environment schemes, he added.

In England the concern among farmers is that Pillar Two measures will be maintained at the expense of the Single Farm Payment.

Commodity trading houses under fire

Commodity trading houses are secretive, largely unregulated, pay relatively little tax and, until recently, have made big profits. Not surprisingly, they have come under increasing scrutiny with the Financial Times headlining a major investigation on Monday ahead of its global commodities summit which was marked by an anti-industry protest. NGOs argue that their speculative activities increase volatility, creating more uncertainty for farmers, and force up prices for consumers. They also reinforce asymmetries in north-south relations. For a special issue of Food Ethics on this subject go here: Food Ethics

Leading commodity houses such as Cargill are reacting by saying they need to be more transparent about their activities. But there is a tension there, because it is having an information edge in relation to supply and demand patterns that enables a commodity house to trader profitably. Their defenders would argue that they enable the market to work more efficiently by clearing the market and helping price adjustments. They link regions of surplus and deficit around the world.

Commodity houses cover a number of sectors of the economy including minerals, metal and oil, as well as agriculture. According to the FT, the net income of the largest trading houses since 2003 surpasses that of the combination of mighty Wall Street banks Goldman Sachs, JP Morgan Chase and Morgan Stanley, or that of an industrial giant such as General Electric. They made more money than Toyota, Volkswagen, Ford Motor, BMW and Renault put together. However, times are now more difficult, particularly since the recent drop in commodity prices. Aggregate profit growth has stalled.

When I have attended specialist agriculture conferences, someone from Cargill is often there, but they generally keep a low profile. Probably their own data is better than that being presented. William Wallace founded Cargill in 1865 as an Iowa grain elevator, but it now operates in 65 countries, employing 140,000 people. The company is privately held by about 80 of Wallace's descendants, although staff have a 17 per cent stake. It is by far the world's largest trader of agricultural commodities, a turning point being when it bought rival Continental in 1998. It has the biggest market share in key raw materials such as sugar, corn and wheat, putting it in a position to be a price maker rather than a price taker.

Cargill's name is well known, but there are also less known companies in niche markets. For example, the Hamburg-based family-owned Neumann Kaffee Gruppe is behind the beans that go into one in seven cups of coffee worldwide. Swiss-based trading house Ecom Agroindustrial mills more coffee beans than any other company. According to the World Bank, its clients include Starbucks and Nestlé. Company turnover in 2011 was in excess of $4 billion.

The sector is largely unregulated. Switzerland, the main hub of these companies, has admitted that 'Physical commodities traders are, in principle, not subject to any oversight.' The tax burden is low. According to the FT, they pay less tax than oil or mining groups or Wall Street banks.

But the growing level of scrutiny is ringing alarm bells. Cargill has warned that trading houses must embrace ethical and transparent business practices or risk getting into hot water with regulators.

Hoovering up farmland

Sir James Dyson has bought up thousands of acres of Lincolnshire farmland, reports Farmers Weekly. He is believed to have paid some £150m for more than 6,800 ha./17,000 acres through a new company Beeswax Farming (Rainbow) Ltd. He has purchased much of the Norton estate which was destined to be Britain's largest dairy farm until the plan was defeated by animal welfare activists, backed up by objections from the Environment Agency.

There's nothing new about wealthy investors or even institutions buying up farmland, indeed the institutitional involvement has been greater in the past and led to a report. One of the advantages of owning farmland is that it does not incur inheritance tax. Some critics argue that farm land values are bumped up, making it difficult for 'genuine' farmers to expand or enter the market. Average English farmland values reached £22,500/ha (£9,100/acre) in the last three months of 2012. If you borrowed to buy at those sort of prices, you could not fund the lending out of farming.

There has been a fierce debate in Farmers Weekly about whether young farmers should be given a hand up the farming ladder if they are not going to inherit a farm. The general view seems to be against special subsidies, and indeed one would not want to create a new category of subsidy. Many would-be farmers have to settle for being a farm manager.

One argument in favour of some form of subsidy is the ageing farm population, which applies across Europe. However, the figures may be somewhat misleading as the nominal head of the farm may be semi-retired.

One challenge has been the reducing number of county council farms available for rent. For many farmers these relatively small farms served as the first, but sometimes the last, step on the road. Like many farms, they survived by the farmer's partner working. However, many county councils have been selling off these farms to realise the capital.

Farming is hard work and demands a wide range of skills. The returns are often little better, or even worse, than the minimum wage per hour worked (although not on arable farms in Lincolnshire). Of my two nephews from a Welsh hill farm, one has moved to Manchester where he pursues an urban lifestyle. The other works the farm with his father and evidently enjoys his way of life.

Life imitating art

The battle over the future of Bridge Farm in The Archers has been won by the hard headed business case over the more sentimental 'way of life' arguments associated with Pat Archer's affection for her cows. I thought that possibly the script writers were a bit behind the curve as in today's economic climate farms have to be run as a business. But I am also aware that farmers work very long hours in arduous conditions for returns that are often little better than the minimum wage, particularly on livestock farms.

It was therefore interesting to see a 'way of life' argument from a farmer who said that if money were the driving force he would be better cashing in and living off the interest (I don't think he would get much of a return at today's rates unless he moved into risky products). He took exception to remarks made by agricultural economist Sean Rickard who said that the weather was not to blame for small producers not being able to cope. The farmer argued that the weather affected everyone. That is true (subject to regional variations), but I infer that what Sean Rickard was arguing was that larger farms have a better capacity to cope with such events, e.g., they have more access to finance and better economies of scale.

Consumers are attracted by visions of the traditional family farm, but one also has to be hard headed about the financial dimension if the business is to survive and prosper.

Farmers face early SFP hit

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

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

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

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

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

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

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

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

Further cuts in direct payments?

CAP direct payments look set to be cut back even further than the recent level agreed by EU governments, it emerged this week, as the budget needs exceed the available funds. Agra Europe reports that the spending gap is due to the 2014-2020 funding cuts agreed by EU leaders in February, along with the need to fund a new 'Crisis Reserve' for emergency market measures under Pillar One and also the final stage of subsidy phasing-in for 'new' member states.

This is likely to lead to the first instance of the ‘financial discipline’ mechanism kicking in since its inception in 2003, as the European Parliament is treaty-bound not to accept a budget deficit. What happens next is somewhat uncharted territory. However, hard pressed farmers are likely to react angrily.

CAP negotiations overview

My views on the current state of the CAP negotiations can be found here: CAP reform

Not sure I agree with the headline, as I think there is still a long way to go in terms of getting a more functional CAP, although it is the case that I am in favour of more discretion being given to member states in terms of how they implement the policy.

The likely main sticking points in the trilogue negotiations are discussed in this video: Trilogue

Parliament good for democracy but not for decision-making

The CAP is such an important part of what the EU does, not least in budgetary terms, that the European Parliament had to be made a decision-making partner if the institution is to mean anything in democratic terms. The downside is that it makes the whole process of arriving at an agreement on reform even messier and more complicated than it was before. Moreover, those most directly involved tend to represent farm interests. The end result is likely to be a reform package that is more incoherent than usual, and that is saying something.

After marathon talks in Brussels earlier this week, EU member state agriculture ministers finally came up with a CAP reform negotiating position, reports Agra Europe in what can rightly be seen as a significant step forward for the process. The Irish Presidency should be praised for its persistence in getting a deal between member states done halfway through its term in office and hopes are raised for a final deal to be set in stone before the end of June this year. 25 of the 27 states were in agreement after the meeting – Slovakia and Slovenia chose not to support it – and this is a strong mandate to take forward into trilogue talks with the Commission and Parliament.

Compromises were made on all of the major aspects of the policy including direct payments, the single CMO, Rural Development and Financing and Monitoring. However, it is apparent that the agreement will not put to bed the matter of CAP reform as many Parliament rapporteurs expressed dismay at many aspects of the Council position. The fact that the farm ministers did not rule out the possibility of ‘double funding’ for farmers 'destroys the legitimacy potential of greening,' according to the Parliament's rapporteur on direct payments post-2013, MEP Luis Manuel Capoulas Santos.

Agriculture Commissioner Ciolos meanwhile said he is 'delighted a clear consensus exists for 30% of direct payments to be linked to a more sustainable CAP'. The greening measures would be of a 'mandatory' nature under Council's stance as, penalties for non-compliance would go beyond 30 per cent of the Pillar One subsidy, he stressed. Yet Italian centre-right MEP Giovanni La Via, the Parliament's rapporteur on the 'Horizontal' Regulation, claimed losing the greening component of payments would be 'a high enough penalty' for farmers not complying with the new requirements. In other words, he wants to water it down.

Paolo De Castro, the Parliament's agriculture committee chairperson, probably summed up best the current state of affairs. 'There are some areas where the Council followed the Parliament's lead and others where we will have to negotiate intensively,' he said. The ‘intensive’ trilogue talks between the European Council, European Commission and European Parliament are provisionally due to kick off in early April with a hectic schedule of meetings between then and the end of June, when it is hoped a final agreement will have been thrashed out. What sort of agreement it will be remains to be seen, but one fears that it will be watered down.

Parliament has its say

The European Parliament has had its say on the CAP reform process and, as predicted by Agra Europe last week, has largely backed the amendments proposed by its agriculture committee (ComAgri). The majority of MEPs backed the four ComAgri positions on direct payments, rural development, financing and market measures as the momentum towards a final agreement, potentially within the timeframe of the current Irish Presidency, gathers pace.

However, some hurdles remain. The Parliament vote largely proved that there is still work to be done before a deal that satisfies all member states can be reached. Parliament did back a number of key aspects of the Commission proposals such as the ‘capping’ of Pillar One payments as well as its plans on ‘active farmers’. 'Capping' would have implications for UK farmers in particular, a number of whom operate on a large scale.

Key vote in European Parliament on CAP

Next week, the European Parliament will get to vote on CAP reform and the compromises agreed by its agriculture committee (ComAgri) back in January. It would seem to be the opinion of the majority within European agricultural circles that some form of consensus will need to be found at the vote if the CAP is to be reformed in time for 2014, reports Agra Europe.

But what are the chances of an agreement being reached? There are still a number of hurdles to be overcome if a deal between member states is to be reached. The biggest sticking points appear to be over the ‘greening’ of the CAP and what this should constitute, the capping of direct payments, the speed at which the EU should oversee the convergence of Pillar One payments between member states and the scope of coupled aid.

ComAgri chairman Paolo De Castro says next week’s plenary will provide MEPs with the opportunity to ‘fix’ the problems with the CAP reform process. He conceded that his committee may have made some 'mistakes' when adopting its position earlier this year but the vote will provide the opportunity to write these wrongs. Meanwhile, other MEPs, such as German European People's Party member Elisabeth Jeggle have told Agra Europe that many of her colleagues will side with the ComAgri compromises next week.

10 per cent real cut in CAP budget

It looks as if the outcome of the EU budget negotiations might be a 10 per cent cut in real terms in pillar one for UK farmers and a 22 per cent cut in pillar two: Budget Outcome

A similar estimate of a 9 per cent in CAP expenditure in real terms, with an even bigger cut in rural development expenditure, is made by Oliver Lee of Andersons' Farm Business Consultants: Extent of cuts

It is interesting that he notes that this would bring CAP expenditure down to 39 per cent of the multi-annual financial framework, bringing it below 40 per cent for the first time. Given that it was over 70 per cent in the 1980s, this does show that incremental change can make a difference. But it is still questionable whether anyone starting with a blank sheet of paper would want to spend over a third of the EU budget on the CAP.

A typical CAP compromise

The Irish Presidency offered an alternative to the European Commission’s proposals on the convergence of CAP direct payments within member states at Monday’s Farm Council, and it seemed to go down well with most of those in attendance reports Agra Europe.

The Irish proposal, that would only require member states to move partially to uniform area-based direct payments by 2020, was backed by a majority of governments at the meeting, although Farm Commissioner Dacian Ciolos made it clear he opposes the plan, criticising it for a lack of 'ambition'. He has a point, as it is a typical CAP compromise on the lines of 'make me pure, but not yet'.

All member states are to move towards a uniform payment per hectare at national or regional level by the start of 2019, the European Commission said in its CAP reform proposals, with a transitional period to apply up to 2018. But many member states feel this suggestion is too drastic and the consensus seems to be that a slower pace of transition is required.

CAP reform assessed

Here is a thoughtful and detailed look at the CAP reform proposals from the slow food movement: Slow Food

In particular there is a detailed consideration of the greening proposals. Their general view is that the proposed reforms do contain some significant gains for sustainability.

CAP budget reduced in size

The EU Council finally reached an agreement on the Multiannual Financial Framework (MFF) after marathon talks last weekend and it did not make for good reading for those who wanted to see an increase or real terms freeze in CAP spending reports Agra Europe.

The CAP budget agreed for 2014-2020 will be nearly €16 billion below what the European Commission wanted at €362.79bn − €277.85bn for Pillar One and €84.94bn for Pillar Two (P2). This is provided it is passed in a straight Yes/No vote by the European Parliament – the first time this has happened – as mandated by the Treaty of Lisbon, which came into force midway through the current 2007-2013 MFF period.

Under the Council agreement, rural development spending will be €7.03bn less than proposed, but the blow is to be softened for many member states, who are to get a ‘special’ P2 envelope as well as their share of the remaining P2 pot.

What this represents is the first time a CAP budget has been reduced in size but also an unparalleled degree of flexibility for member states over how they shuffle the financial resources dealt to them. However, no member state is going to escape the fact that restrictions on agricultural subsidies and state spending will be in place for the next seven years at least as the CAP enters an age of austerity.

Sterling fall boosts farm incomes

The weakening of sterling against the euro over the past four months potentially boosts UK farmers' single farm payment subsidies by £240m. For every 1p/euro change in exchange rates, the UK's single farm payments alter by around £40m. SFP accounted for around 15 per cent of UK farm incomes and can be an even bigger slice of profits. For example, over half the profits at Cooperative Farms, the country's biggest farmer, are down to SFP.

Currency fluctuations also affect market prices with a 1p weakening against the euro adding £200m to UK farmers' total income. For example, a farmer producing a typical wheat crop should get about £18 a hectare more from wheat sales with the euro worth 6p more. That's nearly ten times the impact on that farm's SFP.

The downside is that inputs such as feed, fertilisers and sprays could now be 7 per cent more expensive in sterling terms, if all the currency effects are passed on. Machinery could also be more expensive.

France gives some ground

France, the EU’s biggest beneficiary of CAP funds, had previously been in favour of opposing to any cuts to the share of CAP spending and instead favoured a freeze at 2013 levels in nominal terms (meaning a real terms cut) – a view supported by other member states such as Germany, Spain and Italy. However, President Francois Hollande now appears ready to accept a reduction after addressing the European Parliament this week and claiming that his main priority for the summit is to ensure 'expenditure levels that preserve our common policies'.

CAP spending 'will be reduced' compared to the European Commission's spending proposal, he conceded, adding this will provoke 'difficult restructuring for a sector that is essential [for France]'. Hollande’s speech could well pave the way for an agreement between member states and signal that a compromise agreement is there to be had. Whether it will be enough to appease those states looking for deep budget cuts such as the UK, Sweden and the Netherlands remains to be seen.

France’s apparent move away from its pledge to fight for a nominal freeze in the CAP budget has not gone down well with farming groups in the EU, with umbrella organisation Copa-Cogeca demanding a freeze at a 400-strong meeting in Brussels on Wednesday.

A good survey of French interests, and changing perceptions, of the CAP can be found here: France

Is a CAP deal possible?

The next key phase of the CAP negotiations occur in the context of the budget negotiations at the EU summit on 6/7 February with spending on agriculture remaining a major stumbling block. A further summit is due in mid-March. The Irish presidency needs a deal on the budget agreed by the Council and Parliament by the end of March if it is to have any hope of securing a substantive CAP deal by the end of June

The recent vote in the European Parliament agriculture committee was a first step towards a CAP deal, although if it doesn't like what eventually emerges then the Parliament can veto it. It should be noted that the committee backed capping of support at £250,000 with payments reducing on a sliding scale after £125,000 which will hit many farms in the UK.

Some are concerned that the proposed extension of discretion to member states (and regional governments) in many areas of the CAP will create more of an uneven playing field, undermining the single market. Others would argue that such discretion is not only necessary to make reform politically palatable, but also reflects the geographical diversity and range of challenges encountered in what will soon be an entity with 28 member states with very different agricultures.

Is there still life in fat taxes?

Bruce Traill, the president of the Agricultural Economics Society, writes in their latest newsletter: 'Denmark is abandoning its short-lived experiment with the world’s first fat tax just as the use of fiscal measures to improve diets and offset the social costs of unhealthy eating appeared to be gathering momentum; the UN Special Rapporteur on the Right to Food, the National Heart Forum and the European Heart Network, have called for the use of various forms of food taxes and subsidies in the past year. Even David Cameron floated the idea in 2011.'

'The Danes taxed products with more than 2.3% saturated fat content at 16 KR (c£1.75) per kg of saturated fat (13% of current retail full-fat butter prices). This was deemed sufficient to have driven hordes of Danes into the welcoming arms of German and Swedish retailers, "exporting" 1300 jobs (according to the Danish Food Workers Union). It’s a pity there wasn’t time to evaluate the impact of the measures on consumption (Copenhagen University’s finding of a 20% fall in purchases of fats and cooking oil in the 3 months from introducing the tax were skewed by hoarding in the run up to the tax and cross-border shopping).'

'Small taxes (and subsidies) on foods or nutrients are never likely to have a big impact on consumption and health, but they do raise a lot of money and are cost effective according to OECD; the Danish tax raised about £150m in a year, the French soda tax a similar amount. Fiscal measures also give incentives to producers to reformulate their products. The EU EATWELL research project recommends ring-fencing revenue generated by a tax for use in other cost-effective healthy eating programmes.' [Although one might add that politicians are never keen on hypothecating revenues because it restricts their freedom of manoeuvre.]

'The US Supplemental Nutrition Assistance Programme and Women, Infants, Children schemes, targeted at subsidising healthy foods for poor consumers, would be good candidates. They have been shown to be highly cost-effective and would be good models for wider adoption in Europe. As they specifically target disadvantaged groups, they partially address a criticism that fiscal food measures are regressive. And if the taxes were applied Europe-wide, the Danes would have to travel a long way to find cheap butter.'

Irish presidency searches for consensus

Monday’s Farm Council meeting in Brussels kicked off with Irish agriculture minister Simon Coveney reaffirming that his country’s Presidency’s 'ambitious' aim will be to reach a consensus among member states on a 2014-2020 CAP by March 18-19 this year, with European Parliament approval by June reports Agra Europe. He believes there are '30 or so' elements of the reform proposals still dividing member states, which he stressed was a 'manageable number', while EU Farm Commissioner Dacian Ciolos said the proposed timetable was 'difficult but not impossible' (which means that it probably is unattainable).

Coveney urged his fellow ministers to start moving from 'fixed' to 'compromise' positions so the Council can reach a common position. 'This hasn't happened yet and it needs to start happening now,' he warned, noting wide support for Dublin's work programme and the 'extraordinary' job by the Parliament's agriculture committee (ComAgri) to establish its negotiating position last week.

Ministers raised a number of lingering individual concerns at Monday’s meeting, notably the need to make the 'greening' requirements of the proposed reforms simple and workable and the risk to certain sectors posed by the planned equalisation of subsidies within member states or regions by 2019.

The plan to tie 30 per cent of direct payments to new environmental requirements - and for recognition of 'equivalent' measures - remains a big concern for many countries, with the Dutch delegation warning there is still 'a lot to do' at both a technical and political level. The UK, Denmark, Latvia, Estonia and Slovenia all reiterated calls for states to have more flexibility to implement greening, though French agriculture minister Stéphane Le Foll urged ministers to focus on reaching a compromise based on the Commission's proposals.

Briefing on CAP developments

Here is a video briefing by agricultural journalists on latest developments in the CAP as the Irish presidency starts: Briefing

Not sure if all the foot traffic in the background is meant to provide authenticity, but it could be distracting.

Farmers could not survive without subsdies

Almost three quarters of farmers say they could not survive without subsidies, according to a Farmers Weekly poll: Subsidies

How does one wean farmers off their subsidy dependence so that they become more like any other business that relies on returns from the market? No one is suggesting that they should be withdrawn overnight. The official Defra position is to phase out the single farm payment and that is resisted by most other member states.

Part of the solution must to be to ensure that farmers are better able to earn a return from the market through competition policy measures that redress the balance between them and supermarkets. But the politics of that are complicated as supermarkets deliver cheap food to consumers whose budgets are already under pressure.

Defra boss upsets farmers

Defra secretary of state Owen Paterson has upset farmers by calling for direct payments to them to be scrapped as possible. He argues that taxpayer subsidies should be limited to public goods: Paterson

His predecessor had a farm organisation background so such plain speaking may come as a shock.

The Irish presidency

In this video interview, Irish farm minister Simon Coveney looks at the challenges facing the Irish presidency in terms of securing CAP reform: Presidency

'Could do better' is end of term report

As 2012 draws to a close and the Cypriot EU Presidency concludes, agriculture ministers and MEPs across the 27 member states took time this week to reflect on how CAP reform negotiations have gone over the past six months.

Agra Europe reports that there was a general feeling of satisfaction that significant progress has been made but also the admission that much work still needs to be done in the coming six months under the Irish Presidency.

On Tuesday, ComAgri announced that from the near 8 000 amendments to the European Commission’s CAP reform proposals sought by member states, the total has now been whittled down to just 100 compromise agreements, which will be voted on in January. A final vote will only take place once the EU’s next long-term budget has been agreed (likely to be early February, 2013).

The outgoing Cypriot Presidency released its progress report on its six months in charge of CAP reform, praising the 'positive spirit' of the negotiations over the period, but observers would still probably come away with a nagging feeling of ‘must try harder’.

As Irish farm minister Simon Coveney reiterated, 'nothing is agreed until everything is agreed,' admitting it would be a 'big ask' to get a CAP deal by June, which is widely seen as the deadline if parts of the new policy will be ready for 2014.

Many ministers were openly frustrated at the lack of progress on the EU’s 2014-2020 budget, which is undoubtedly the major hurdle for the reform of the CAP. Of course, the amount spend on the CAP is a hurdle in the way of a budget agreement in the eyes of some member states, not least the UK. Beyond that there are still obviously problems to be ironed out with the ‘greening’ element of the proposals as well as questions about the plan for the internal convergence of direct payments. What that means is that some get more, but perhaps not as much as they hoped for, and others get less. That's never an easy balance to draw.

France determined to defend CAP budget

The EU budget for 2013 was finally signed off this week after the European Parliament approved a compromise agreement between member states that will give the CAP slightly less next year than was originally proposed by the European Commission, reports Agra Europe

CAP payments for 2013 will total €56.44 billion, a marginal increase from the current year but €350 million lower than what the Commission asked for. This leaves the Pillar One direct aid and market-related payment kitty at €43.93bn, up 0.13 per cent from this year, with the Pillar Two rural development budget set at €12.5bn - 3.38 per cent greater than in 2012.

On the subject of the next long term budget, France set out its stall against any cuts to the CAP budget for 2014-2020 and called for greater reductions from elsewhere in order to appease countries such as Sweden and the UK, who are fighting for greater reductions than are currently on the table. If the CAP is left inviolate, this would mean quite substantial cuts elsewhere, in particular in programmes that might do more to stimulate the growth of the European economy than the CAP.

As the biggest recipient of CAP funding within the EU, France is determined to pull back further funds into the agricultural budget after European Council President Herman Van Rompuy proposed a less drastic reduction of €17bn at the EU budget talks, softening on the €25bn he had earlier proposed.

But 'several billion' euros will still need to be restored to the budget if it is to satisfy France, the country’s European Affairs minister Bernard Cazeneuve told journalists at a European Parliament plenary session this week. But no specific amount to be recovered for the CAP is being aimed for, a spokesperson for the French Agriculture Ministry told Agra Europe.

Top official admits CAP deal will be delayed

A senior European Commission official let slip this week that the Brussels establishment is now preparing for the likelihood that reform of CAP Pillar One will be delayed until 2015, as time is running out on reaching a political agreement in time for the start of 2014, reports Agra Europe.

Gwilyn Jones, a member of EU Agriculture Commissioner Dacian Ciolos’ cabinet, is perhaps the first official to publicly say what many analysts have been thinking for a while now – that positions on this particular part of the CAP are too far apart for an agreement to be reached in the near term.

With the fairly radical overhaul of the Pillar One direct payment scheme proposed by the Commission and the subsequent debate on issues such as the convergence of payments and ‘greening’, it was always likely that this particular part of the CAP would divide member states.

However, the crux of the matter is still almost certainly the failure to conclude talks on the EU’s next long term budget – the multiannual financial framework (MFF) for 2014-2020. MEPs have made it clear they are not prepared to make any decisions on the CAP until they know how much money they have to work with.

Now that a MFF agreement is not likely to happen until late January at the earliest – when the talks will resume – it puts added pressure on efforts to reach a compromise deal and put the relevant measures in place in time for January 1, 2014.

Agra Europe's Chris Horseman believes that an agreement on CAP reform was not likely to happen before next summer at the earliest - but it would appear that even this deadline will now not be met.

So what now? Ciolos has made clear that he is still aiming for an agreement to be made in time for 2014 but has also mooted the idea of a “transitional year” taking us to 2015.

It is unlikely, however, that Pillar One in this transitional year will look any different to how it does now. The exact same structure for CAP direct payments would have to remain, provisionally, in place. The only difference is that if in the meantime agreement is reached on an MFF deal that will see the CAP budget trimmed, there will be less money available from 2014.

The assumption would be that the existing single farm payment scheme would ‘roll forward’ but with a cut in the budget of the order of 2-3% - and under the Financial Discipline Mechanism rules that would translate automatically into a proportional cut in each farmer’s direct aid payment cheque in 2014. This is a scenario which is unlikely to satisfy anyone, but such an outcome is all too familiar with the CAP.

There is more optimism that a common position on Pillar Two – rural development – can be reached in time for 2014, as was expressed at the recent Farm Council. How this could sit with a Pillar One framework that maintains the status quo will be something for MEPs and domestic ministers to ponder as they enter the Christmas and New Year break.

Progress towards a European food model?

This paper reports on an Austrian workshop that sought to review progress towards a European food model: Food model

The construction of such a model has been an aspiration of the EU since the Fischler reforms of the Common Agricultural Policy. It sought to replace an earlier crude productionist model that emphasised the quantity of production with one that put the consumer at the centre of the model with an emphasis on quality rather than quantity. Implicit in this approach was a contrast with an American model which still adhered to a more Fordist model of homogeneous mass production. The interests of the farmer were still served because high value added production offered the prospect of better margins per unit of production.

The flaw in this model was that, although niche production had flourished as consumers had become wealthier and more discerning, a lot of European agriculture was still dependent on price-sensitive commodity production. An era of austerity has reinforced consumer behaviour in which price is the dominant consideration.

The Austrian paper takes sustainability as an unifying principle and considers the relationship between a number of dimensions such as food safety, food quality, regionality, diversity and value and appreciation of food.

From a British perspective there is an interesting absence of any reference to animal welfare. Indeed, it is claimed that conservation is promoted by 'bringing rare species and endangered animal breeds back on the table of consumers.' In other words, one eats that which is conserved.

Nevertheless, this paper is an interesting contribution to a continuing debate: what, if anything, is distinctive about European agriculture and how can the CAP best serve it?

Trade-distorting subsidies fall

Trade-distorting farm subsidies in the EU fell in the last year for which figures are available (2009-10) to a mere €15.5bn. This puts them well within limits proposed in the Doha Round: Trade

The same source contains a useful summary of the agricultural dimension of the recent EU budget negotiations: Budget

Irish farmers have been worried enough by the threat to farm subsidies to occupy Commission offices in Dublin: Protest

Auditors criticise SAPS scheme

A scheme designed to support farmers' income in the accession states is riddled with flaws. Among the unintended beneficiaries have been ski clubs, hunting associations and real estate companies.

The European Court of Auditors has published its first special report (SR16/2012) on income support paid to farmers in the new Member States. It is calling for reform to ensure that income support be directed to the active farmer who conducts concrete and regular agricultural activities. In particular, public entities managing state land and not otherwise involved in farming should be excluded from EU farm support and no payments should be made in relation to unutilized land or land which is mainly devoted to non-agricultural activities.

The Single Area Payment Scheme (SAPS) was designed to enable the new Member States who joined the EU in 2004 and 2007, to support farmers’ income. It is currently applied in 10 EU Member States and the related expenditure amounted to 5 billion euro in 2011. The Court’s report focuses on the beneficiaries of the policy, on eligible land and on the contribution of the scheme to the objective of supporting farmers’ income.

The overall conclusion of the audit is that the implementation of the scheme resulted in a number of questionable features:

• The definition of the beneficiaries of the scheme is inadequate: it permits payments to be made to beneficiaries not engaged in agricultural activity, or only marginally so. Cases in point include real estate companies, airports, hunting associations, fishing and ski clubs.
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• In addition, in some of the countries concerned, aid was legally paid to (and supported the income of) public entities managing state land but not otherwise involved in farming. The state is the largest beneficiary of SAPS payments in Hungary (14 million euro in 2010 for 82000 ha of land).
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• The total agricultural area in relation to which SAPS should be paid was not reliably determined by the Member States but accepted by the Commission. This influenced the amount of aid per hectare paid to each farmer which was sometimes higher or lower as it should have been. Some countries revised the total agricultural areas without proper justification. This allowed them to fully use their respective financial envelope.
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• In spite of efforts made by the Member States concerned, aid was paid for parcels where no agricultural activity was carried out.
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• There is an inherent contradiction in the design of SAPS aid: it is, on the one hand, intended to support the individual income of farmers, but on the other hand, the aid is distributed to farms based on the area of parcels of land at their disposal.
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• SAPS primarily benefits large farms: overall, 0.2% of the beneficiaries receive more than 100000 € representing 24% of the total value of payments.
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• Finally, even though SAPS was designed as a transitional scheme, most Member States have not prepared for the introduction (foreseen in 2014) of the system (based on payment entitlements) which is already in place in EU-15 Member States. This may result in significant delays in payments in the future.

The Court recommends a better targeted and results oriented policy whereby support to farmers’ income should be directed to the active farmer who conducts concrete and regular agricultural activities and should exclude public entities. The eligibility of land for aid should be clearly defined and limited to parcels on which concrete and regular agricultural activities are required. A more balanced distribution of aid between farmers should be sought either by capping higher individual payments or by taking into consideration the specific circumstances of the farms in the different regions. The Commission should address the structural weaknesses in the farm sector and actively support the Member States and more closely monitor their preparations for the introduction of a future entitlement-based scheme.

Could European young farmers become extinct?

The number of young farmers in Europe today is falling fast. We have reached a point where only 6 per cent of farmers across the European Union are under the age of 35. The situation is even worse in members states like Italy, Portugal and the United Kingdom, where the young represent less than 3 per cent of the entire farming community. This state of affairs is reaching breaking point, with five times as many farmers over the age of 65 than there are farmers under the age of 35 – this cannot continue for long.

With so little influx of youth into European agriculture, the sector could soon lose much of its competitiveness on a global market. Young farmers' representatives consider that nothing less than future food security and the vitality of rural areas across Europe is at risk. If nothing is done about the significant lack of generational renewal in the sector, European food production will be hit particularly hard as many elderly farmers retire. This is an aspect of food security that has been very much neglected.

With the Common Agricultural Policy currently being reformed for 2014-2020, there is a window of opportunity to counteract these developments and to prioritise this key age group in EU agricultural policy. If action isn’t taken now, European agriculture will not be able to face present and future challenges such as increased environmental protection, job creation, biodiversity conservation and above all, food security.

In order to raise awareness of this issue among the general public and policymakers alike, CEJA – the European Council of Young Farmers – has recently launched a campaign entitled “Future Food Farmers” which I am happy to endorse. With the support of European Commissioners, MEPs and key stakeholders in the sector, CEJA aims to reverse the negative demographic trend that is common to all Member States of the European Union and help young farmers to secure the future of European agriculture.

Everyone can express their support for the cause by taking the campaign’s online pledge, and join public figures like the President of the EESC Staffan Nilsson, Commissioners Dacian Cioloş, Janusz Lewandowski and Janez Potočnik, as well as MEPs Paolo De Castro, Luis Manuel Capoulas Santos and George Lyon in their efforts to keep EU agriculture alive. The online pledge is here: Pledge

The campaign video can be viewed here: Young farmers

Grey mouse rocks France

EU Council president Herman van Rompuy has proposed an EU budget that is €20bn less than the current EU budget and at least €75bn less than the European Commission's original proosal. It focuses cuts on agricultural spending including a €13.2bn reduction in farm subsidies which drew a furious response from France. It does also plan to cut the UK rebate of €3.5bn.

There is also a row going on about cohesion funds. The Friends of Cohesion constitute a group of 14 member states from central and eastern Europe, with some from Southern Europe. They face a group of member states known as the Friends of Better Spending, but there are only seven of them (Austria, Germany, Finland, France, Italy, Netherlands, Sweden. Another name could be the 'group of net contributors': Better Spending .

Not all of those seven would sign up to a significant reduction in farm spending. Indeed, one could only rely on the Netherlands and Sweden.

Van Rompuy's proposals would mean €13.2bn less for Pillar One (P1) and €8.3bn less for Pillar Two (P2) for the 2014-2020 period than wanted by the European Commission in its initial CAP reform proposals. The cut is three times greater than the €6.8bn the Cypriot Presidency had suggested trimming off earlier this month, proposals which themselves caused a big storm.

The Cypriot plan would have seen €50bn cut from the overall EU budget, but Van Rompuy’s proposal would double that figure to nearly €100bn. Under the Council President’s plan, spending on P1 direct aid payments and market tools over the seven years would go from the €283.05bn tabled by the EU executive down to a maximum of €269.85bn, nearly 4.7% less. The CAP would bear the brunt of further cutbacks as a planned 'Crisis Reserve' to fund emergency measures - for which the EU executive had earmarked €3.5bn - would also be included under P1.

The P2 budget for co-financing national rural development programmes should go from €91.97bn to €83.67bn, around 9% less, Van Rompuy said. The Commission proposal for P2 already involves a 10% cut in real terms from 2013 to 2020, so a further €8.3bn reduction could mean some member states seeing their rural development envelope cut by more than 20% in real terms. Potentially, at least, this form of spending can be more socially useful than Pillar 1.

Somewhat predictably, EU Farm Commissioner Dacian Ciolos responded that the suggestion 'goes against efforts to make the CAP fairer, greener and more efficient'. He also said that this was the 'first step away from a common agricultural policy' and that it could set the CAP budget 'back 30 years'.

With the crunch talks on the multiannual financial framework set for next week (November 22-23), one interpretation is that the Council President has decided that some appeasement of the net contributing states is needed to ensure that the summit is not ‘dead on arrival’ and that progress can be made.

Meanwhile, Agra Europe analyst Brian Gardner has suggested a way to knock around 25% off the EU budget for 2014-20 in his latest comment article – reduce the size of the CAP budget by 75%.

He argues that with the strong likelihood that crop prices will remain at historically high prices in the years to come, largely due to increasing demand, the EU can afford to only provide subsidies to those farmers who really need it.

The EU's most efficient cereal growers in France, Germany and the UK, for example, with average yields of above eight tonnes per hectare, can make adequate profits without receiving EU income subsidies, he argues.

US-EU trade pact could be sunk by farm wars

Following the US elections, EU trade commissioner Karel De Gucht has sought to revitalise talks on a comprehensive bilateral trade deal between Europe and the EU. It reflects a growing recognition that nothing is going to come out of the Doha Round.

However, there is a long history of 'farm wars' between the EU and the US on everything ranging from chickens through pasta to beef hormones. The dispute on GM crops has been particularly troublesome as it is a subject of concern to many EU citizens.

The EU would like to eliminate agricultural tariffs as part of any deal, but Mr De Gucht admitted, 'Access to our agricultural markets will be one of the bones of contention.'

Although US trade supremeo Ron Kirk appears to take the idea seriously, and it has the backing of business interests in the States, it is less clear whether it has the high level political backing necessary for success. President Obama is not known for his interest in relations with Europe and did not give a lot of impetus to trade policy in his first term.

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Parliament delays CAP reform process

The decision by the European Parliament’s agriculture committee (ComAgri) to delay a vote on laying out its official position on CAP reform until the beginning of next year once again brings into question whether an agreement can be made in time for the new policy to be implemented by the start of 2014. Indeed, for some time I have thought this very unlikely.

Although an official date for the vote was never set, it was generally considered that one would need to take place either this month or next in order for the Farm Council to have enough time to reach a consensus on its own reform package, and then for ‘trilogue’ talks to be held between EU institutions that will finally result in an agreement for the 2014-2020 CAP budget, reports Agra Europe.

MEPs have made it clear that they will not be pushed into approving the next CAP until the EU’s next long term budget is in place and the generally negative feedback from the Cypriot Presidency’s recent proposal to shave €7 billion off the bloc’s multiannual financial framework (MFF) for 2014-2020 is not an encouraging sign that heads of state will come to a firm agreement by the end of the crunch summit on November 22-23.

Those calling for a freeze or cut in real terms to the EU budget will have seized on the recent European Court of Auditors report, which again found that large sums of budget funds in 2011 were misspent, with rural development spending coming in for particular criticism. This is likely to increase the vulnerability of this form of expenditure to cutbacks given the importance of the single farm payments to the revenue streams of most farmers.

With austerity biting across the EU, and distrust in the institutions growing among the electorate, particularly in the UK, it must now be time for the European Commission to push through improved measures of accountability and transparency on how funds are being spent.

Nicosia gets the thumbs down from all sides

It isn't easy being a small state and holding the presidency of the EU, especially when you have to make proposals about the future of the CAP. Cyprus has ended up being attacked from all sides for its suggestions for a way forward on the CAP budget.

The Cypriot EU Presidency’s proposal to cut EU spending by €50 billion as compared with the Commission’s original proposal in the 2014-2020 period, including a €7bn reduction to the CAP budget, has been categorically dismissed by those on both sides of the budget debate – those who want to see an increase, and those pressing for bigger cuts, reports Agra Europe.

Nicosia has suggested reducing spending on CAP direct aid payments and market measures over the seven years from the €283.05bn tabled by the Commission to a maximum of €277.40bn, a cut of just over 2%. The Presidency also suggested reducing the EU average level of direct payments per hectare by at least 0.27% a year between 2015 and 2020, which would trim the proposed overall expenditure on direct payments in 2014-2020 by 1.3%.

The EU's rural development budget - used to co-finance national programmes - would go from €91.97 to €90.82bn, a 1.3% cut, under the Presidency's revised version of the 'negotiating box' for the multiannual financial framework (MFF). My hunch is that, unfortunately, this is where the brunt of the cuts will eventually fall. It only benefits some farmers and there are transaction costs in accessing it.

France has threatened to veto any deal that will result in a cut to the budget for agriculture, with farming groups across the continent calling for nothing less drastic than a CAP budget freeze. The European Parliament, which has also called for a freezing of the CAP budget, slammed the Cyprus Presidency's plan and claimed its voice has not been heard.

The proposal 'sends out a bad signal' and 'will inevitably put in jeopardy the future of certain key policies and programmes,' according to the Parliament's lead negotiators Reimer Boege and Ivailo Kalfin.

France and Germany recently backed the European Commission’s proposals to freeze the 2014-2020 CAP budget at 2013 levels in nominal terms – a reduction in real terms - and have subsequently found support from some of the usual suspects: Spain, Italy and Ireland among others.

On the other side of the debate, the old reformist coalition of the UK, Sweden and the Netherlands are pushing for cutbacks across all areas, including the CAP. This week the UK government, again backed by Sweden, argued that the Presidency proposals for a €50bn cut to EU spending 'don't go far enough' and that the figures are 'still way too high'.

Essentially Europe is split between, on the one hand, those 10 net payers to the EU budget, such as the UK, the Netherlands, Sweden, Denmark and Finland, who put more into the kitty than they get out, and on the other the 17 net recipient member states who mostly want to see an increase of at least five per cent. For all the talk of solidarity, it comes down to what you pay in and what you get out.

The net payers cannot justify an increase as it runs contrary to what they see as the severe economic reality currently gripping Europe. But the net recipients argue that growth and development across the bloc will be severely hampered unless struggling countries get the additional help they need. That may be so, but giving that help to agriculture is not the best way to boost growth and employment.

It's not all Balls

The ploy by Ed Balls and Douglas Alexander to call for Dave Cameron to secure real cuts in the EU budget is a way of setting an elephant trap for the prime minister. They know if they were in office they would have great difficulty in securing such cuts given the stance of other member states. But it will give them another chance to score a few political points by portraying the Government as weak and incompetent, as well as increasing disarray on the Conservative benches.

So it's a smart tactical move. But once we get away from the partisan point scoring, they do have something interesting and important to say in their Times article. They point out that for all the fuss about Brussels bureaucrats, administration only takes up 6 per cent of the EU budget. £45 billion is sucked up by the CAP at a net cost to the UK of £1 billion a year (although we do get a budget rebate).

They argue, 'Although the butter mountains of the past are long gone, the need for reform is no less urgent. The CAP is an obstacle to international trade liberalisation, creates too few jobs and introduces distortions so that there is not a level playing field. The EU cannot afford this waste.'

They maintain. 'further reform of the CAP must not just be discussed but implemented.' If only. I think there will be some real cuts, but they will be mainly at expense of Pillar 2 expenditure which helps the environment and the rural economy. The blanket subsidies of Pillar 1 (the Single Farm Payment) will remain largely untouched.

There are a number of net beneficiaries of the CAP who will defend it to the last hedge row. But there is more to it than that. France gets less than it used to from the CAP, but for the French it is more than a question of the financial benefits, important though those are. It is also about a vision of Europe in which agriculture plays a central if often symbolic role. It is about a statist mode of government in which intervention in the market is seen as beneficial in the name of food security. Even though some are questioning whether France can continue to afford to allow 56 per cent of its GDP to be spent by the government, those attitudes are not going to change any time soon.

Interesting that Gisela Stuart, the Labour MP for Birmingham Edgbaston, thinks that Britain should contemplate leaving the EU: Stuart . Admittedly, she has been moving in a Eurosceptic direction for eight years or so and is now something of a maverick on the Labour benches. But she was born in Germany and is a particularly thoughtful MP. What she says needs to be taken seriously.

Where her argument is perhaps weakest is in relation to the possibility of a two-tier EU, although I think she is correct in her judgment that a negotiation would not deliver that much in terms of a repatriation of powers (certainly not an exit from the CAP). This is not one of the usual supspects and it may be an early indication of a real shift in the political climate.

Oil seed rape loses its glow

Fewer oil seed rape fields may be seen in Britain following adjustments to EU policy. It's quite a complex story, but there are two big lessons to be learnt from it. First, individual planting decisions on farms are directly affected by the EU policy (although there are agronomic advantage to oil seed rape - known as canola in North America - as a break crop). Second, well-intended environmental interventions may have unforeseen consequences that cancel out the advantages it was hoped that would be gained (although we are in contested territory here).

Back in 2008 it was agreed by the EU that as part of the effort to combat global warming, each member state should derive at least 10 per cent of their transport fuels from renewable sources by 2020. However, since then there has been renewed concern about global food shortages. Biodiesels are only one and by no means the most important factor in such shortages: but their use can be influenced by policy decisions. Environmental groups have also argued that the EU policy encourages farmers in countries such as Indonesia to cut down forests that act as carbon sinks to grow crops for use as fuel in Europe, thus making global warming worse.

The canary yellow fields are a major feature of the summer landscape in Britain and have even become a niche attraction for Japanese tourists. They also contribute to biodiversity as the flowers are favoured by pollinating bees and birds nest in the stems.

UK rapeseed production rose 70 per cent in the decade to 2011, amounting to roughly 40 per cent of the land planted with wheat. Roughly one-fifth of British rapeseed oil production goes into biodiesel. Farmers are now likely to switch into wheat which, of course, is in a sense the intention of the policy modification.

There is, however, fierce resistance from the biodiesel industry to the draft proposals who are crying foul. They invested heavily in refining capacity based on the 2008 rule change.

The Commission has, in fact, watered down its original proposals, but has only succeeded in upsetting both camps. Environmentalists claim that the proposals do not go far enough, the industry that they go too far.

Some of this is very technical, but food crop-based biofuels are still to be banned from contributing more than 5 per cent of transport fuel consumed in the EU. 'We are sending a clear signal that future increases in biofuels must come from advanced biofuels. Everything else will be unsustainable,' said EU Climate Commissioner Connie Hedegaard when unveiling the proposal in Brussels.'

Rob Vierhout, secretary general of advanced biofuel producers ePure went as far as to claim the Commission is 'NGO-driven' but there was little evidence that there was a great deal of satisfaction from that side either. 'If this proposal becomes law, biofuels more damaging to the climate than crude oil will still be used to meet green transport targets,' Greenpeace’s EU transport policy director Franziska Achterberg claimed.

Anti-poverty charity ActionAid called the proposed 5 per cent biofuels limit on food-based biofuels an 'important symbolic first step,' but called for a total ban on food and land-based fuels and fired back at the biofuels sector by accusing the Commission of buckling to industry pressure by taking the 'heart out of the proposal'. The Institute for European Environmental Policy was similarly scathing about what it saw as a Commission climbdown on in the face of industry pressure while welcoming the biofuel cap

Perhaps what one can say is that government interventions of this kind, however well intentioned, are always fraught with the risk of going wrong and end up displeasing everyone. One of the commentators on the industry side said that if the Commission pursued their line they might as well scrap the CAP. Be careful what you wish for.

Are UKIP wrong about the CAP?

Stuart Agnew MEP, the UKIP agricultural spokesman, has said the EU 'has become far too big to have a CAP.' There are certainly those who think that the EU is too geographically diverse to have a 'one size fits all' policy, although in practice it is not really like that. He also criticised farmers who receive subsidies for wind turbines and solar panels on their land as 'robbing the poor to pay the rich.'

European Commission official and agricultural economist John McClintock was trotted out to defend the CAP and said that scrapping the CAP 'could lead to food riots like we have seen in other parts of the world like Haiti.' This is scaremongering of the worst kind, but defenders of the CAP have seized on the food security card.

Mr McClintock is described as an agricultural economist, but he doesn't seem to have much love for the market mechanism. He said, 'There are still people who dream about the free market in agriculture, but the reality is that it could be socially disastrous.' Socially disastrous for whom, one has to ask?

Mr McClintock said that scrapping the CAP would mean that many farmers would not be able to survive. But is getting rid of marginal and inefficient producers necessarily a bad thing? He also argued that food prices would go up, but this could be offset if the EU lowered the high tariff walls it erects against much of the rest of the world. Defenders of the CAP argue that this helps the EU to be self-sufficient, but is it such a bad thing to import from countries well suited for agricultural production? Anyway, if one is concerned about self-sufficiency, perhaps there ought to be renewed attention to the quality of agricultural land when development takes place?

He also said that one of the main objectives of the CAP was to ensure that farmers had a comparable income to those in cities. Fair enough, but there are many people in rural areas who are not farmers and suffer from relative poverty. Surely this is a case for income supplements rather than subsidies to agriculture?

Similarly he argued that the CAP kept the countryside alive. But that is a case for transparent subsdies to keep the land in good heart and environmentally sustainable, not for blanket subsidies like the single farm payment.

The CAP costs €50bn a year and hardly represents value for money. 40 per cent or more of the EU budget represents a high opportunity cost. But, of course, we are where we are and withdrawing subsidies overnight would hit the rural economy hard. So it is incumbent on those who would withdraw from the EU to say what they would replace the CAP with in terms of domestic policy.

Thinking about the unthinkable

Fifty years ago saw the start of the Cuban missile crisis. It was a frightening time if you were fifteen years old, as I was, and whatever else one says about Jack Kennedy, one has to admire the way he managed the crisis and resisted the calls of the hawks for early military action. Now it's all old history and it was announced today that two of the Cold War missile sites have been given listed status.

Nuclear war strategy was referred to then as 'thinking about the unthinkable'. Perhaps we also now need to start thinking about another kind of unthinkable, Britain leaving the European Union and what sort of domestic agricultural policy might replace the CAP. Whatever one thinks of British membership of the EU, few would mourn leaving the CAP, but British farmers would be worried about what would take its place. No doubt some contingency thinking is already being undertaken.

My hunch is that if there was a straight yes-no choice, the majority of British voters (although perhaps not in Scotland) would vote to leave. There is some evidence to support this. Peter Kellner of YouGov has written an interesting contribution on underlying attitudes for the LSE European Politics blog: Kellner

In essence the message is that there are three attitude clusters in the electorate in terms of attitudes to the outside world and only one of those could be largely relied on to vote in favour. Kellner thinks that fear would shape a lot of decisions. Of course, that could be fear of the consequences of staying in or fear of the consequences of leaving. Much would depend on the campaign.

Of course, we may never get to a yes-no vote. Dave Cameron does not like the EU, but he does not want to withdraw. His favoured scenario is to 'renegotiate' after the next election when the Conservatives might have an overall majority. He would then put the renegotiated deal to the electorate. Harold Wilson took the stance of 'no entry on Tory terms' before the 1975 referendum and got a few goodies out of the EU, but essentially we stayed in on the terms agreed by Ted Heath. Dave would probably get some concessions out of the EU, but they would fall short of what Eurosceptics wanted.

Hence some Eurosceptics are calling for a yes-no referendum at the time of the next election. Conservatives are worried about a UKIP victory in the 2014 European Parliament elections, a more than likely scenario, and then losing votes to them in the following general election.

How this will all play out depends on a wide range of different factors affecting Conservative Party politics. If Labour wins, there is a different scenario (although if they were dependent on Lib Dem support, there would be another one again). Ed Miliband always jumps on any bandwagon that comes along, although usually what he does is call for a public inquiry rather than a referendum. There wouldn't be any judges left to staff the courts if all his requests were granted. However, Miliband could promise some sort of referendum, although its timing and nature would probably be left vague.

Anyway, the point is that Britain leaving the EU is a sufficiently serious possibility to start thinking what we would do then and that is what I plan to do over the next few months, starting with the nature of agricultural policy betweeen the end of the Second World War and our accession to the EU.

Dancing towards convergence

EU Farm Commissioner Dacion Ciolos is said to be resigned to the fact that the current proposal for internal convergence of direct aid payments will need to be watered down in order for a compromise to be reached, reports Agra Europe.

'It is no longer acceptable for two hectares of hill land in the same member state with the same agronomic potential to account for differences of €100 to €600 and, in some regions, even more,' argued the Commissioner at the 2012 Congress of EU umbrella farmers union Copa-Cogeca last week. 'Over the period 2014-2020, a genuine convergence campaign is quite simply unavoidable if we want to still be credible.' One might add that there are a lot of things about the CAP are incredible, but that hasn't stopped them remaining in place.

There appear to be two groups of member states working on alternatives to the Commission’s plans for internal convergence. Some 40 per cent of a country’s Pillar One envelope would be used for flat-rate aids in 2014 under the current proposal, but critics claim this will lead to subsidies being moved away from more productive areas.

But then, of course, there has always been confusion about whether the CAP is there to boost the competitiveness of EU agriculture or act as a form of social policy for marginal farmers. In practice it is more of the latter, but a remarkably inefficient one in terms of reaching its target at minimum cost.

The losses and gains incurred by farms due to the transition should be limited, Ireland, Spain, Lithuania, Denmark, Portugal and Italy are said to have argued at the recent Management Committee meeting. Under a proposal tabled by the six, countries would be allowed to ring-fence ‘greening’ payments for individual holdings rather than on a national or regional basis – cushioning the impact for livestock farms in particular.

Meanwhile, Austria, Belgium, the Czech Republic, Hungary and Slovenia are pushing for member states to be able to apply a flat rate of national or regional subsidies in 2021, rather than 2019. Warning against what they say would be a “profound redistribution” proposed for some countries, governments would be able to choose between three alternative convergence models.

Only a handful of liberally-minded countries are understood to have defended the Commission’s proposed timetable for convergence, albeit conceding that some degree of flexibility is necessary.

The issue is likely to be a tricky one of the agenda of the Farm Council in Luxembourg later this month.

France and Germany do their deal

Long-term observers of the CAP know that any agreement between France and Germany can often shape the direction of the reform process. Even with many more member states, this still remains true. Earlier this week the two countries issued a joint statement calling for a freeze at 2013 levels in nominal terms Agreement

Calls for a nominal freeze in the budget, which will still mean a decline in real terms, have been growing in recent months and around half of governments voiced their support for the Commission plan at a General Affairs Council late last month.

The country’s two agriculture ministers – France’s Stéphane Le Foll (rather superior and disdainful in a typical French mode) and German counterpart Ilse Aigner – came to the agreement after meeting in Berlin. They cited the 'importance of the CAP for growth, employment and the environment and innovation in rural areas along with Europe's role in ensuring food security worldwide', in their statement. In other words, the traditional rather general but fine sounding justifications of a dysfunctional policy.

Their rejection of any reduction in Pillar One allocations was also notable taking into consideration the fact that Germany is the biggest contributor to EU funds, while France is the biggest beneficiary of direct aid payments. Germany and France join the likes of Austria, Belgium, Finland, Greece, Ireland, Luxembourg, Malta, Portugal, Romania and Spain in opposing cuts, leaving member states such as the UK, Netherlands and Sweden seeking a more austere budget with a reduced prospect of success.

Of course, British prime minister Dave Cameron is under heavy pressure from within his own party to take a tough line in budget negotiations. Indeed, Dave is no fan of the EU and reflects the traditional British distaste for the CAP in particular. Vetoing the budget would go down well at home, but it would also mean that the EU would revert to annual budgets determined by qualified majority voting, reduced the influence of Britain and its allies.

Meanwhile for an authoritative account of tensions between member states and the European Parliament over the CAP, this blog post by Christilla Roderer-Rynning is recommended: Parliament