Wine reform will lead to job losses

The competition: a vineyard in Chile

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

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

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

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

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

Plus ça change, plus c'est la même chose

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

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

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

Scrap CAP says Commons committee

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

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

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

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

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

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

Wine lake threatens to overflow

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

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

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

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

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

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

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

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

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

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

Sugar reform hits trouble

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

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

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

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

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

Commission waters down wine reform

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

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

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

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

Accession states face surplus stocks fines

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

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

Butter mountain finally melts

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

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

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

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

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

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

'We're all doomed'

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

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

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

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

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

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

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

Fruit and veg reform could bring health benefits

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

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

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

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

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

One Vision, Two Steps

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

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

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

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

Sea of ignorance

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

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

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

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

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

It's nice to have it confirmed

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

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

Abolish CAP subsidies

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

New market develops in farm subsidies

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

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

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

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

So, goodbye then, President Chirac

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

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

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

Three options for the future of the CAP

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

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

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

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

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

EU loses patience over Indian wine tariffs

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

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

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

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

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

'Suspended pessimism' remains Doha mood

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

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

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

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

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

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

Biofuels may push up beer prices

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

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

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

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