It all goes bananas

The WTO is going to have to step in to arbitrate between the EU and Latin American countries on how its import control system, based on a blend of tariffs and quotas, should be replaced by a tariff only system.

The EU seems relatively relaxed about the challenge from Ecuador, claiming that there was a 'gentleman's agreement' to resolve matters in this way. Less relaxed are the small Caribbean with a heavy reliance on banana exports.

Relatively few bananas are grown within the EU (mainly in the Canary Islands and Greece). The tropical fruit is popular as a snack, especially in Germany which has the highest per capita consumption in the EU. When the wall came down, many East Germans came in search of bananas. There were great celebrations in Britain when supplies of the energy boosting fruit became available for the first time after the Second World War.

It's cheaper to produce bananas on large plantations owned by American multinationals in Central America, countries such as Ecuador and in Hawaii. And these companies have a lot of political clout in the US through donations to both political parties. Hence, the 2001 agreement.

The Windward Islands and Jamaica have already taken a hit. Before the creation of the common market organisation for bananas in 1993, there were 24,000 banana farmers in the Windward Islands, a figure that had fallen to 7,000 in 2001. Production in 1999-2002 was 50 per cent of the 1989-92 figure. The fall in Jamaica has been smaller, but is still substantial.

However, there have been some gainers among ACP countries. Belize, Cameroon, the Dominican Republic and Cote d'Ivorie have all expanded production and exports. In particular, Cameroon and Cote d'Ivorie benefit from low production costs comparable with those of dollar banana producers.

The EU has proposed a common tariff of €230 per tonne which leaves no one pleased. The ACP producers want a higher tariff of €275/t, while the dollar area exporters want a zero tariff or at most the €75/t level applied at present to quota imports.

The likely outcome us that the EU will have to make further concessions on the tariff and compensate disadvantaged least developed countries through the Special Framework of Assistance that is to be used in relation to the sugar regime, as well as through other EU development policies.

That way EU consumers will have a reliable supply of reasonably priced quality fruit and it will not be necessary to revive the song 'Yes, I have no bananas.' But some LDCs could go the way of Suriname whose EU exports ended in 2002 with the bankruptcy of its banana export company.

Size of cash payments to big farmers revealed

The extent of CAP payments made to farmers in the UK in 2002-3 is revealed in data released under new Freedom of Information legislation.

Among the beneficiaries are the Queen who receives over half a million pounds for her estates at Sandringham and Windsor. Prince Charles received nearly £135,000 for his Duchy of Cornwall estate and just over £90,000 for Home Farm, Highgrove.

The largest sum in direct farm payouts went to Farmcare Ltd., a subsidiary of the Co-operative Group, which banked £2,601,767. Lilburn Estates, farmed by Duncan Davidson, founder of builder Perismmon, received £1.3m and multimillionaire Sir Richard Sutton £1.1m. The Vestey Family Trust received just over £906,000.

Leading dukes are all paid six-figure cheques. The Duke of Westminster, reckoned to be the second richest man in Britain, was paid £448,472 through Grovesnor Farms Ltd.
The Duke of Marlborough, who owns Blenheim Palace, received £511,435 through the Blenheim Farm Partnership. The Duke of Richmond, who is said to be worth £45 million, was paid £456,404 through the Goodwood Estate Company. The Duke of Bedford did rather less well with £365,801, while the Marquess of Cholmondeley received only £306,619 and Sir Richard Fitzherbert had to make do with £245,215.

These sums are dwarfed by the amounts received by large companies in the form of export refunds and other payments. Tate and Lyle led this league with over £127m, but Nestlé UK got just over £11.6m.

EU plans to dump grain surplus on world market

The EU's trading partners are likely to be angered by plans to export a grain surplus that has developed in the last few months on to the world market. Bulging grain intervention stores were thought to be a thing of the past but problems have been caused by a massive harvest in 2004 in the Czech Republic and Hungary. Hungary faces particular problems as a landlocked country and the increased transport costs associated with exporting its grain.

The volume of grain in EU intervention stores has jumped from less than 4mt to more than 10mt since purchasing commenced in November. The Czech Republic and Hungary are facing problems in finding enough storage space for the surplus grain (mainly wheat). Commissioner Fischer Boel has said that the volume of grain has now reached a 'critical mass' and it is planned to open an export tender.

Budget cuts could hit rural development

If the EU budget from 2007 to 2103 is held at one per cent of economic output as some member states insist, it could be the rural development budget that takes the hit. Market support is seen as too politically sensitive to tamper with.

This also applies to the ongoing argument about whether cash for direct aid payments in Romania and Bulgaria should be included under the budgetary ceilings agreed for EU farm payments up to 2013. The option of squeezing the two new members within existing guidelines has been raised as a way of saving several billion euros.

However that would probably mean a reduction of eight to nine per cent in direct aids which would be politically unacceptable to countries such as France. The switch towards a Common Agricultural and Rural Policy, in the spirit of 'multi-functionality', could be placed in jeopardy.

Most of sugar mountain was for making jam

Estonia has claimed that the greater part of a massive sugar mountain in the country is the result of Estonians hoarding enormous amounts of sugar to indulge in the favourite national pastime of jam making.

However, the matter is far from funny as the small Baltic country faces up to €50m in fines (2% of GDP) for failing to get rid of as much as 90000t of surplus sugar prior to accession. Accession rules state that new member states have to bear the cost of getting rid of stocks of any product 'exceeding the quantity which could be regarded as constituting a normal carryover.' Estonia is charged with having failed to prevent traders flooding the low price Estonian market in anticipation of much higher EU prices after enlargement.

The problem in Estonia is seen as a test case on which to base discussions with other new member states. Cyprus and Malta are in the firing line for having high sugar surpluses.

Franco-German farm deal may have to be re-opened

EU Budget Commissioner Dalia Grybauskaite has said that 'a large group of countries' were looking to re-open the Franco-German farm deal that freezes spending until 2013 at current levels in order to take account of the accession of Romania and Bulgaria in 2007. 'A gentle reopening could be to include in the ceiling Romania and Bulgaria, which weren't included in the 2002 Brussels deal', she said. France is, however, opposing the move.

Skids are under CAP

The threat to the existence of the CAP as we know it is very real, according to Lars Hoelgard, deputy Director-General at DG Agriculture. Any eventual settlement of the current budget dispute under 1.14% of GNI, the current Commission draft figure, would hit agricultural spending and even this figure would lead to cuts. Heolgaard commented, 'Something has to give - Pillar 1, although supposedly set in stone, is under threat.'

Even if the draft on the table was accepted, which is not very likely, farm spending would fall from about 45% of the EU budget now to around 35% on 2013. This reflects the fact that, according to Agra Europe 'Of all the EU's policies, the CAP is fast becoming the least fashionable under Commission president Barroso.'

Dairy farming faces particular problems. If a deal on global trade liberalisation is reached at the WTO talks in Hong King in December, the EU may not be able to sustain the required reductions in tariffs, particularly if the dollar remains weak.

Insurance

One possible response is the debate on farm insurance systems which is attracting increasing attention. It would be an alternative way of safeguarding farmers against income fluctuations. A draft Commission document has been circulating exploring some kind of stabilisation fund. Rural development funds could be used to help farmers to pay insurance premiums up to a maximum of 50% (although this seems to imply using Pillar 2 money to achieve Pillar 1 objectives). Mutual stabilisation funds through producer groups, supplemented by some EU money, are another possibility.

Sugar mountain is back

The EU has had to accept sales of sugar into intervention for the first time in nearly twenty years. Sugar is understood to have been offered in both France and Belgium and the intervention authorities are obliged to accept any product that meets basic quality criteria. The last time this happened was in 1986.

Normally EU sugar surpluses are dumped on the world market with the assistance of what is in effect an export subsidy system. But traders are unhappy about the current EU export refund rate for sugar which they think is not enough to let them sell their surpluses at a profitable price. In particular the weakness of the $ against the € has caused problems in world markets. Hence, the intervention sales are as much a political ploy as anything else.

As far as the Commission was concerned, 'It shows once again the urgent need to reform the system.'

Thinking the unthinkable

Support for co-financing farm subsidies in the future is growing. Under such an arrangement member states would bear a proportion of the subsidies to their own farmers. The context is the demand by the EU's six leading paymasters that the budget from 2006 to 2013 should be capped at one per cent of gross national income. Any such deal would unstitch the 2002 agreement on farm spending and would also represent a further renationalisation of the CAP.

The plan has received unexpected support from Italy's prime minister Silvio Berlusconoi. This may just be a ploy to split the countries that want to restrain the budget.

However, there is also support in the European Parliament. MEPs argue that if member states are not to pay a share of the subsidies, farmers in the 25 member states will lose out when Romania and Bulgaria join the EU in 2007. Dutch Liberal Democrat Jan Mulder has advocated co-financing since 1999. 'It would put the agricultural budget in line with other parts. We have co-financing in rural development, in structural funds, in foreign policy: we should also have it in agricultural policy.' But he insists that topping up by member states should be made compulsory, not optional, so that farmers get parity of treatment.

The new member states are likely to reject the suggestion giving that their payments are being phased in up to 2013. Mulder argues that the poorer states could get a higher percentage from Brussels, but that proposal would be unlikely to attract support from the richer states. However, a budgetary crunch does look likely after 2006 and some change is going to be necessary.

No more nasty surprises says Fischer Boel

EU farmers need not fear fresh unsettling novelties in agricultural policy once sugar reform is complete, farm commissioner Mariann Fischer Boel told women farmers; representatives during Berlin's Green Week. 'I have no further reform package in my briefcase to shake everything up again,' she said.

She also told farmers that she was having second thoughts about letting sugar quota remove across national borders, one of the key parts of the proposed sugar reform. The move has been opposed by a group of ten less efficient countries led by Spain, but backed by UK growers and processors as one possible way of maintaining scale in the British sugar industry.

One might also think that not allowing quotas to move across borders is incompatible with the idea of an internal market, although dairy quotas cannot be traded from one country to another. However, the prevailing mindset among farmers was illustrated by German farm leader Gerd Sonnleiter who urged Mrs Fischer Boel to 'restrict calls for the destruction of what has been an effective means of regulating the market.'

Mrs Fischer Boel may yet be forced into further reform by tight budgetary constraints. Budget commissioner Dalia Grybauskaité, commenting on proposals to cap the EU budget at one per cent of gross national income, described farm spending as an area 'far from competitiveness, only pretending to be competitive, except maybe for the rural development programmes.'

Uncommon Agricultural Policy?

Ever since the 2003 reforms of the CAP, there has been concern about renationalisation of the CAP. Within certain limits, the reforms allowed member states to decide how far they would decouple payments for different commodities. The basis on which the Single Farm Payment was made also varies between (and within) member states. The availability of 'national envelopes' for special payments to particular categories of producer also raises competition issues within a supposedly single market.

Now the issue of co-financing for 'Pillar One' of the CAP has raised its head, particularly in Germany. (The second pillar is subject to co-financing). It has been argued that it should be on a 75-25 basis with member states having to find €25 from their own funds for every €75 they wanted from Brussels. This could be a means of holding down EU spending and allowing net conributor states to keep spending down to one per cent or less of gross national income.

The talk has rung alarm bells in the Commission which has moved swiftly to knock the idea on the head. Commissioner Mariann Fischer Boel has argued that if co-financing was compulsory, it would mean a complete renationalisation of the CAP. If it was made compulsory, then the bottom line would always be the same. Resorting to the old argument that the CAP is the foundation stone of the EU, she declared, 'agricultural policy is the only common policy we do have in the EU and this would be the end of it.'

The renationalisation genie is, however, out of the bottle and we may not have heard the last of this idea.

MEPs probe butter fraud

The budgetary control committee of the European Parliament is to probe a fraud scandal involving fake Italian butter that dates back five years. The Italburro affair became public after police discovered that a milk processing plant in Naples had produced large quantities of artificial butter using synthetic ingredients. This led to the payment of hundreds of millions of euros in production and export subsidies in Italy, France, Germany and Belgium

MEPs want the Commission to be more proactive in recovering the money. Legal proceedings were not begun in Belgium until 2003 and action has been confined to administrative fines in Germany. That is, however, more progress than has been made in France where the fraudulently claimed subsidies amount to €100m, but no court case has been brought against anyone involved.

Twelve people are now behind bars in Italy, but not before there had been two members linked to the case.

Royal family farm subsidies may be made public

Under Britain's new Freedom of Information Act, the subsidies members of the royal family receive from the Common Agricultural Policy are likely to be made public. Farm minister Lord Whitty has said that he can see no reason why single farm payments should not be subject to disclosure. At present the only member state in which this happens is Denmark.

In practice the figures may be less interesting than supposed. The Duchy of Lancaster and the Duchy of Cornwall estates are farmed by individual tenants so the payments go to them rather than the Queen or the Prince of Wales.

However, last year Oxfam estimated that seven of Britain's richest men collectively earn more than £2m a year in payouts from the EU. It was estimated that the Duke of Marlborough receives £369,000 for his arable farm on the Blenheim Estate in Oxfordshire while the Duke of Westminster, one of the richest men in the country, receives £326,000. One of the largest claimants is in fact The Co-operative Society that owns 100 farms covering 85,000 acres.

Polish farmers gain from EU membership

The impact on Polish farmers of the first eight months of EU membership has been broadly positive, accordance to senior Polish agriculture official Waldemar Guba addressing the Oxford Farming Conference. Before enlargement farmers were concerned about the differences in technologies, the effect on the labour and land markets and what was seen as the unfairness of the accession package.

Farmers had benefited from increased trade, extra investment in food processing, some improvement in land prices, only a moderate loss of jobs but, above all, from a rapid rise in prices. Since accession pig prices had climbed 21%, cattle prices 37% and poultry by 32%. There had only been a two per cent increase in milk prices and wheat prices, affected by drought, actually fell by three per cent.

Total agri-food exports in the first six months after accession rose by 34.7% compared with the same period in 2003. There has also been a significant increase in investment in the Polish agri-food sector. This was helping to prepare the 600 or so food processing plants which are not yet compliant with EU health and hygiene regulations but have to be by 2006.

The biggest problem Poland has faced since accession has been on the currency frint, with the zloty appreciating strongly against the euro. This had hit export competition and lowered the value of subsidies.

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New ag secretary likes his pork

George W. Bush's nominee for agriculture secretary, Governor Mike Johanns of Nebraska, is a man who liks his pork. Outgoing ag secretary Anne Veneman was unenthusiastic about the 2002 farm bill that gave generous subsidy increases to US farmers. Mr Johanns was a strong advocate for the legislation, leading the issue for the Western Governors' Association during the debate over the legislation. President Bush praised the bill when announcing the nomunation, which led to a 27 per cent increase in farm subsidies last year to over $16bn, as 'critical to the success of our farmers.'

The stance of Governor Johanns is not surprising when one considers that Nebraska, which is the fourth largest agriculture exporting group, was also the fourth most heavily subsidised farm state between 1995 and 2003. According to the Environmental Working Group, the state's farmers (particularly corn, soyabean and wheat growers) received more than $7.5bn in subsidies between 1995 and 2003.

Mr Johanns' appointment received warm support from farm lobbies. Keith Berry, the president of the National Pork Producers' Council, called him a 'top-notch agricultural leader' and praised his involvement in international trade issues.

No Turkish delight

As the controversy over future Turkish membership of the EU grows, it is becoming increasingly evident that the burden that would be placed on the CAP would be considerable. German Christian Democrats and leading politicians in France are advocating a 'privileged partnership' for Turkey as an alternative to full membership.

The Commission has estimated the CAP cost of Turkish membership in 2025 (at 2004 prices) at €11.3bn. A new study by the University of Wageningen, which admittedly makes an unrealistic assumption about membership being possible by 2015, gives a much smaller figure of an extra €5bn on the annual bill for agricultural and rural support. Indeed, the study also makes a number of other assumptions that may not be fulfilled such as reform of the sugar regime, abolition of export subsidies and a 20% appreciation in the Turkish lira. However, the study also argues that Turkish membership would lock the EU into a long-term commitment to continue transferring resources to an underdeveloped agricultural sector.

The report predicts that massive pre-existing problems of poverty and unemployment in rural areas would be made much worse in the short term by the shock of competition with farmers in the rest of the EU. Turkey is seen as being in no position to implement the complex regulatory structure of the CAP. This is not just a problem of a lack of trained staff, but the dual nature of the Turkish economy in which much work is casual and not officially declared. Moreover, diseases endemic to the country would delay the integration of the country into the single market for animal products for many years. Food hygiene standards are also poor.

The issue of further enlargement is becoming an increasingly fraught one for the EU. Ukranian overtures have received short shrift because of geopolitical considerations. But exactly where does Europe stop? New member states may be unwilling to slam down the shutters. However, this page has serious concerns about the admission of Bulgaria and Romania, both in terms of the financial implications and administrative systems in those countries. Yet delaying their admission would be a big blow to their efforts to reinvigorate their economies. There are no easy answers, but further enlargements are going to increase the pressures on the CAP.

New member states flex muscles on sugar reform

Although they are to receive full rather than phased in payments under the Commission's proposals to deal with the unreformed sugar regime, a number of new member states have been lining up to try and dilute the reform, perhaps giving a hint of the way in which EU agricultural politics is moving.

Hungary, Latvia, Lithuania and Slovenia have signed up to a letter sent to Commissioner Boel arguing that production must be kept intact across the whole EU. Finland, Greece, Ireland, Italy and Portugal are also signatories to a letter which effectively calls for a policy that would freeze the existing distribution of sugar production. However, the Czech Republic, Poland and Slovakia are also said to be sympathetic to this 'conservative' or effectively anti-reform position.

Ranged against them is a smaller group of reform states: the usual suspects (Denmark, Sweden and the UK) plus one new member state (Malta). The UK's stance is in spite of the fact that research suggests that a 25% cut in the UK's production quota could lead to a 54% fall in the area under sugar beet. Germany and the Netherlands have some sympathy with this position.

Finland could be bought off by special measures for its Less Favoured Areas. France has advocated a more geneous restructuring fund. This could be a way forward, as it would allow restructing to proceed, but with more generous side payments to those who lose out.

Commissioner Fischer Boel has warned that it is unrealistic to expect sugar production to continue in all member states. Meanwhile, the Commission's proposals are under fire on from Oxfam.

Proposals not so sweet for Global South

Oxfam has argued that the Commission's proposals take too little account of the needs of traditional sugar suppliers. Oxfam emphasises the rather flimsy nature of the Commission's proposals for ACP countries and India. They current benefit from access to the EU market at high guaranteed prices which would be cut under the Commission's proposals.

Oxfam argues that prices should be kept high for a time to permit restructuring in poorer countries such as Mozambique and Zambia to allow them to compete on the world market. Such countries suffer from dilapidated transport systems and other infrastructure problems. Quite how long it would take to rectify these problems is unclear, but Oxfam recommends shallower price cuts over a long period.

This proposal has drawn the fire of the European chocolate, biscuit and confectionery industry (CAOBISCO) who effectively argue that Oxfam want to have their cake and eat it. They argue that the Oxfam proposals would artificially stimulate investments directed at an already oversupplied European market.

Beet and biodiversity don't mix

Support for cutting beet production in Europe comes from the Worldwide Fund for Nature who argue that it may be responsible for more loss of biodiversity than any other crop. They argue that it leads to loss of natural habitats, intensive use of water, heavy use of agro-chemicals and discharge and run-off of polluted effluent.

New spy satellites to keep tabs on farmers

The EU is to use new ultrasensitive spy satellites to ensure that farmers are complying with the new single area payments regime. Near earth satellites have been used for some time to detect false claims for arable aid payments or for olive grove subsidies in Italy. The new satellites will be used to ensure that farmers are keeping their land in good environmental and agricultural condition as required by the rules of the new support regime.

The new generation of satellites will provide 'very high resolution' observations that can distinguish features less than a metre across, ten times better than the previous generation of remote-sensing satellites. It will be possible to tell whether farmers are meeting environmental obligations such as maintaining hedges or leaving enough cultivated land to sustain biodiversity around field boundaries. The EC Joint Research Centre in Ispra, Italy, carried out trials of very high resolution monitoring on 15,000 sq km of land last year and 50,000 sq km this year. Next year it expects to roll out an operational programme covering 150,000 sq km, about ten per cent of the EU's total agricultural area.

Although ways of analysing the images by computer are being worked on, the human eye will still be relied on to scrutinise the images for the foreseeable future. Traditional on-the-spot checks by inspectors visiting farms will continue to supplement the satellite monitoring.

For a polity that sometimes claims that it seeks to counter US hegemony, it is somewhat ironic that the project is particularly reliant on the US Quickbird and Ikonos satellites. The whole operation draws attention to the transaction costs of maintaining even a somewhat simplified support regime. The attractions of paying off farmers with a bond scheme remain strong, but such a scheme would be unlikely to attract political support.

Budget problems may affect future of CAP

The main driver of CAP reform from the MacSharry reforms of 1992 onwards has been the need to adjust to adapt to a liberalising international trade regime that has embraced agriculture. In contrast, reforms in the 1980s were driven more by budgetary pressures and were thought to be more susceptible to 'fudged' solutions that fooled those who were not CAP insiders as the political pressures were endogenous rather than exogenous.

However, budgetary pressures may become more important once the 'financial discipline' mechanism comes into operation in 2007. It is difficult to estimate how much the overrun will be because of the assumptions one has to make. However, Agra Europe has suggested that a cut of 7 to 9 per cent every year in subsidies from 2007 could be necessary. This would be a bombshell for farmers and create a political storm in countries such as France.

Pressures on the budget are likely to be increased by the Farm Council not going as far as the Commission would want in terms of a radical reform of the sugar regime, in particular increasing the size of the proposed compensation payments for beet farmers. Moreover, the weakening of the dollar against the euro, which seems likely to persist in the medium term increases the financial pressures on the CAP. Export subsidies are still with us and a weakening of the dollar increases the amount of the export subsidy that has to fill the gap between EU indicative prices for key commodities and world prices that are normally denominated in dollars.

Agra Europe goes so far as to suggest that the cut in direct subsidy could be as much as 30 per cent, but this would be a worst case scenario as far as disruption is concerned. It is the case that some countries are arguing that the EU's budget contribution is too high and should be reduced from 1.14% of Gross National Income to 1%. If this happened it would slash the EU budget by nearly one eighth and reduce the total amount available for agriculture in 2006 from €44.47bn to €39.73bn. However, it is unlikely that the budget would be cut by so much, particularly given the need of the UK to preserve its special budgetary arrangements won by Mrs Thatcher.

What is potentially more of a problem is possible cost overruns as the result of the admission of Bulgaria and Romania with their large and inefficient agricultural sectors. This is an often ignored time bomb that is ticking away with any doubts likely to be swept away by the inexorable momentum of the enlargement process.

One possible consequence of budgetary problems might be an attempt to revive the notion of top slicing the subsidies received by larger scale farmers. Such an idea was advanced by the Commission in the Mid Term Review, but was knocked on the head by political opposition from Britain and Germany. However, reviving a scheme of this kind would at best offset the cost of admitting Bulgaria and Romania.

The next round of budgetary pressures may have a greater impact on a CAP that has substantially changed since the 1980s.