The future of the CAP

Interesting and informative article in The Economist looking at the future of the CAP: CAP

Debate on future on CAP launched

The European Commission has launched a debate on the future of the CAP. Judging by the remarks made by EU farm commissioner Dacian Ciolos to the European Parliament, one of his main concerns is to engender broader public understanding of and support for the CAP. But if you want to take part in the debate, you should go here: Debate

Foot dragging US damages Global South cotton farmers

An interesting study from the ICTSD finds that US cotton subsidies continue to damage farmers in the Global South. Ths US dragged its feet, only acting at the last possible moment to implement a WTO disputes settle mechanism decision. It could do more by cutting domestic subsidies, but it is not surprising that it fails to do so given the political influence exercised by southern cotton-producing states. More here: Cotton

The ICTSD has also done a study of how a trade deal would affect countries importing and exporting cotton: Trade

Commission announces plan for animal health law

The European Commission has announced plans for a new EU Animal Health Law: Animal Health . The law was anticipated in the Animal Health Strategy in 2007 with the objective of securing a single and simplified horizontal legal framework.

Promnoting animal welfare is, of course, a key aspect of a 'public goods' oriented CAP and there is need to move from dealing with animal disease outbreaks to stopping them happening in the first place.

The big question is: who pays? The EU proposes to review spending in the veterinary field with the intention of coming to conclusions in time for the review of post-2013 spending plans. However, member states and farmers will also be expected to contribute.

How can direct payments be justified after 2013?

This is the question that former OECD trade and agriculture supremo Stefan Tangermann poses in a recent issue of Agra Europe. In effect the answer that the agricultural economist gives is that they can't be, although he is too canny to say that in so many words. But he takes each argument for the SFP in turn and demolishes it.

He points out that direct payments make up nearly three-quarters of EU expenditure on the CAP, equivalent to about one third of the Union's total budget. The argument that they are compensation for earlier reforms can no longer be used to justify their continuation.

What about the view that farm incomes lag behind incomes in other parts of society, which in fact is not necessarily the case? Then payments would have to be in line with the criteria for other income support policies. It would have to be means tested so that better off farm families received less. Moreover, payment would have to be higher in member states where the gap was greater which is not compatible with the idea of a level playing field in a single market.

What about the food security argument, the desire to safeguard a viable agriculture in Europe? Tangermann points out that empirical studies show that farm support is largely capitalised in land values. Where land is rented, most of the direct payments flow to landlords. If support was eliminated, 'Land rents will adjust and farming continues.' This perhaps reveals an economist's faith in automatic adjustment in functioning markets. In fact adjustment would probably only occur after a time lag and then not fully. That delay could be cricial for some farmers.

What about enhancing competitiveness? Tangermann points out that competitiveness depends on productivity, know-how, product quality and the like. Education, training, extension services and research and development are the policies that help, not per-hectare payments.

What about the argument that environmental and other standards are more demanding in Europe than other parts of the world? Tangermann notes, 'Research has shown that they differ very much from sector to sector within the farming industry, but also from farm to farm. Overall, though, any such extra costs are relatively small, certainly much smaller than the level of payments currently granted to EU farmers.'

What about cross-compliance? Most of the requirements under cross-compliance would have to be respected anyway: 'Justifying payments on these grounds is akin to granting payments to all car drivers, which are then claimed back from drivers exceeding speed limits.'

So Tangermann concludes that it is doubtful whether any credible justification can be developed for direct payments. But when he gets on to political ground is touch is less sure. Having a good case matters, but there is also a lot of raw power politics surrounding agriculture with many member states willing to spend political capital to defend their farmers. Tangermann says that 'Europe's taxpayers are keen to know why they are expected to finance such payments', but I see little evidence of such interest. Hence, it is possible for agricultural lobbies to mount 'business as usual' arguments with little effective challenge.

Subsidy trade is on the up

Trading of single farm payment entitlements is almost double that of a year ago with prices noticeably higher than in 2009. English flat area or area-only entitlements are changing hands at about £185 a hectare while a full entitlement is worth £225 a hectare. Some purchasers were those who had taken on land without entitlements. Others were speculating on the current subsidy mechanism being rolled on after 2013 or hoping that if the system is dismantled, there could be some form of compensation.

It may seem odd to have a brokered trade in subsidy entitlements, but some economists would argue that it is a second best solution that allows them to be allocated where they are most needed in terms of ability and willingness to pay.

Sarko accepts budget cuts

President Sarkozy has accepted the reality of CAP budget cuts, provided they are offset by greater import protection for farmers: Sarko

Farmers do not lack protection as it is with many tariffs in the three figure range. Sarko says that imported products should be produced to the same standard as in the EU which sounds reasonable enough but in fact is a way of excluding developing country exports altogether.

Continued need for market support

A paper circulated by the Spanish presidency has argued for keeping a strong arsenal of market support measures within the CAP. The paper includes a series of graphs showing the volatility of EU and world food commodity prices, even before the 2007/2008 price spikes.

It is argued that a strong budget is needed to support such measures. Among those specifically mentioned are intervention buying, private storage aids and export refunds. It is evident that the perceived food security crisis is breathing new life into policy instruments that seemed to be on the way to extinction, encouraging those who hope for a 'business as usual' model for the future of the CAP.

The paper does mention earnings and incomes insurance, but does not back the idea pending assessments of the effectiveness of such a tool and its WTO compatibility.

The French agenda

An interesting article in the Financial Times which looks at some short-run political maneouvring in France, reviews French proposals to tackle price volatilty and suggests that, as CAP money is transferred to new member states, the policy may become a drain on the French exchequer, possibly leading to a long-run shift in the French stance: France

Call for tax on livestock emissions

Methane is a particularly powerful greenhouse gas and recent research suggests that it may have 33 times the effect of carbon dioxide when its interaction with airborne particles is taken into account. It is also very persistent in the atmosphere.

Calls for a tax on livestock emissions have been discussed half seriously in the European Commission, but now it has been advocate by the United Nations: Flatulence

What is evident more generally is that agriculture and the food chain has to be fully incorporated in attempts to mitigate and adapt to climate change. However, the farm lobby has been a powerful opponent of the cap-and-trade bill in the US.

CAP support levels reach new high

CAP subsidies as reported to the WTO reached a new high of over €90 billion for the decade in the 2006/7 marketing year, but conveniently most of them have been parked in the allegedly non trade distorting green box, something that has provoked disquiet in Geneva: Subsidies

Ciolos gets positive report

The authoritative Agra Focus has given a positive report on how new commissioner Dacian Ciolos handled his confirmation hearings in front of the European Parliament, although they and others think that the process leaves a lot to be desired.

Given his background it was not surprising that he would handle technical matters competently, but apparently his political atennae were impressive. Let's hope this doesn't mean kowtowing to farm interests. The longest spontaneous applause he received from MEPs in the committee was for stating that he will defend the largest CAP budget possible. He has also received the dubious accolade of being embraced by the farm lobby COPA-COGECA which welcomes his intention to defend a 'robust CAP'.

He did make it clear that direct payments will have to be maintained to provide 'a minimum level of stability in farmers' incomes', but this was not a surprising stance. He cited food security as one reason, but one might question why farmers need financial stability when it is not available to other small businesses that face fluctuating levels of demand.

He did, however, rule out any return to old style policy instruments, making the sensible suggestion of a guarantee or insurance fund that could kick in should there be price volatility. He also wants to reduce the gap between the average payments per hectare in member states by moving away from payments on an historic basis as used in most 'old' member states.

So, it's farewell then Mariann Fischer Boel

Farm commissioner Mariann Fischer Boel says goodbye to Brussels: Boel

I think she's done a reasonably good job, not as good as Franz Fischler, but he was a hard act to follow and whoever came after him was going to have to consolidate and deal with the unfinished business. I am sure that sorting out the unreformed sugar sector required a lot of determination and energy and used up political capital.

The farm commissioner is constrained by the political forces surrounding her and you need to be both a strategist and a wily tactician to change anything. Franz Fischler was both and he also seized a window of opportunity which may not repeat itself now that food security has become a dominant discourse.

NFU slams new CLA policy on CAP

Landowners and conservationists have launched proposals for a more environmetally friendly CAP: CAP

When I attended a RASE lecture last year it was evident that there were some differences of emphasis between the approach of the Country Land and Business Association and the NFU. These have now become more marked to judge from the NFU's response which sees the CLA's approach as 'out dated' and 'naive': NFU

Too much focus on environment

Conservative shadow minister Lord Taylor has said that there has been strong a focus on environmental considerations in agricultural policy. He said, 'If we want a very productive agriculture we want to re-focus the attention that's been diverted away from farming itself.'

It has been apparent for some time that a Conservative government would adopt a more productionist approach to farm policy, but that has always been foreshadowed by the recent Defra strategy paper which was substantially influenced by the growing influence of the food security discourse.

This comes at a time when a new study by WWF-UK and the Food Climate Research Network estimates the food we eat accounts for 30 per cent of the UK's carbon footprint. Previous official estimates had been below 20 per cent. However, these figures take into account emissions generated overseas. It is estimated that more than half of greenhouse gas emissions are accounted for by livestock farming.

What we do not want are ill thought out responses of the 'Meat Free Monday' type which have been criticised by careful analysts like Tom MacMillan of the Food Ethics Research Council. Too hasty a lurch in that direction could have implications for animal welfare.

New ideas from Scotland

The interim report of the Scottish Government's Pack Inquiry has called for direct support to Scottish farmers to continue beyond 2013. You can find out more here:
Pack

No surprises there, but the report also proposes a new top-up find which would be financed by money taken out of the direct payment budget. This could be used to support measures such as fuel efficiency, renewable energy and animal health schemes (an area where Scotland has often been ahead of the curve).

Former auctioneer Brian Pack commented, 'Much more consultation and research is needed, but the idea is that a top-up fund would be used to back outcome and transformational change. It could be the new contract between producers and Scottish society and give the Scottish public the sort of efficient and sustainable agriculture they want to see.'

This is an interesting and innovative idea which deserves further consideration.

It all kicks off in Greece

Greece's financial troubles may be hitting the euro, but this has not deterred Greek farmers who have been in a ten day confrontation with their government as it desperately seeks to stabilise the budget. The farmers have marched through central Athens demanding an extra €1 billion in subsidies.

This is cloud cuckoo land politics but, quite frankly, anything is possible in Greece which has shamelessly misled the EU about the scale of its budget deficit. Greece is the worst kind of party state reminiscent of Italy in the past where politics is about granting favours and can verge very closely to behaviour that is corrupt.

One of the populist slogans is 'Give money to farmers not bankers', referring to the government's attempts to raise funds abroad to pay down its debt. The realities of the situation have been well summarised by Yannos Papantoniou, the former finance minister who took Greece into the euro: 'Deep structural refoms are needed to engineer first growth, then productivity increases. Since the state sector is inadequate and inefficient, the country needs to embrace privatisation and market liberalisation to get growth going again.'

They could start with the agricultural sector which, if it was smaller, might be able to cause less disruption. Farmers have been blocking 20 highway junctions across the country, including a blockade of the country's border with Bulgaria which has upset the fellow EU member state. One might think that, in an internal market, this came within the remit of the EU itself.

But I'm afraid it's old style farm politics in Greece and we shall see a lot of that as the EU and its member states include agriculture in the round of budget cuts.

The health check is over

The health check is now well and truly over so the CAP Health Check blog has been replaced by a new and more attractively designed site at Subsidies

They also have a film on You Tube about the work of their site: You Tube . This is interesting and well-made.

I suppose my view would be that if you are going to have subsidies, one has to be careful about cutting them off from large farmers who are arguably more efficient and certainly more internationally competitive. Of course, 'efficiency' is a contested concept and does not take account of negative environmental externalities, but what that implies is a proper Pillar 2 in the CAP and a new Pillar 3 to deal with climate change (or at least a substantial climate change dimension to Pillar 2).

The NFU perspective on the future of the CAP

Britain's National Farmers' Union is noted for its strategic, long-term view of agricultural issues. Its officials have a sophsiticated, well informed view of developments and it was therefore interesting to read an interview in the latest edition of Farmers Weekly with the NFU's head of economics and international affairs, Tom Hind. He was at one time acting head of the NFU's office in Brussels.

Not surprisingly, he takes the NFU line that farmers need to continue to receive the single farm payment (SFP) to give them a degree of income stability, especially faced with volatile markets. A basic tenet of agricultural economics is that markets for farm commodities are relatively unstable: to put it at its simplest, even with modern agronomy, the weather remains a factor which can disrupt such markets. If one accepts the view that farmers as a category require market stabilisation measures (which is not quite the same thing as income stabilisation), there is still room for a debate about whether the SFP is a particularly efficient or fair policy instrument, but it could be argued that we have to work with what we have.

In any event, he is confident that the long-term legitimacy of direct payments will be strengthened during the upcoming debate about the future of the CAP. He is emphatic that decision-makers in the UK 'must move away from ideologically entrenched positions, especially on phasing-out direct payments.' Not surprisingly, he is heartened by the declaration made by 22 EU governments in Paris in favour of a strong CAP. It's a document short on specifics, but it really represents a political commitment, rather than a set of policy recommendations.

It is interesting that he does fear some further renationalisation of the CAP which many member states pushed during the health check. He notes that in recent weeks several governments have resorted to state aids to give support to their farmers. He is correct to point out that such activities can lead to competitive distortions between member states and hence undermine the single market. What particularly concerns him is the possibility of national co-financing of direct aids. With justification, he fears that UK farmers would lost out as the Treasury would not be keen to top up direct support.

He does oppose direct payment schemes that used farm size or turnover for determining levels of support. He says that such criteria are 'woolly' and they are certainly difficult to interpret and apply in practice given the legal and other issues surrounding what constitutes 'a farm'. However, the real objection is that Britain is one of the countries that would lose out. If one is going to have farm subsidies, and one wants European agriculture to be competitive, should they be denied to the farmers best placed to compete on international markets?

Where I have particular sympathy with him is when he says that what is wanted is a policy focused on the market. This does not mean just decoupling, but also correcting market failures such as excessive retail power. Whether the EU can do much about this is another question. In large part it falls within the competition policy remit of member state governments, but they are often reluctant to rein in retailers who keep down inflation by delivering cheap food to voters, albeit by using contractual and other tactics that are arguably unfair and not in the long-run interests of an efficient and effective food chain.

Clearly someone like Tom Hind is looking at these issues with the needs of his members in mind: that is what he is paid to do. Most of us wouldn't start from where we are and a sudden withdrawal of subsidies could have substantial negative impacts on the agricultural economy.

Nevertheless, modern farmers are much more market oriented and are aware that they have to deliver products that the consumers want: hence the proliferation of farm shops and small-scale processing businesses serving niche markets with value added products. Hopefully, they can eventually be weaned off subsidies, particularly if competition policy is used to remove unfair practices.

Hedge fund moves into agriculture

A leading New York-based hedge fund is moving into agriculture through a vehicle called the American Farmland Company. Optima has $6 billion funds under management. It plans to start its swoop by investing in arable land in Arizona and vineyards in California.

It has no European plans at present and the predominantly smaller nature of most farms in Europe may make it a less attractive location. Even though the US subsidises its farms, especially its larger ones, making farm investment even more attractive, the sheer complexity and the CAP and the uncertainties surrounding its future may be an off putting factor. In the States the initial plan envisages up to 15 farms with an average size of 500 acres, so the involvement is modest.

It is the longer-term strategy that is interesting. Dixon Boardman, Optima's chief executive, believes that economic recovery, continued population growth and increased incomes, especially in emerging markets, will create increasing demand for food. The diminishing availability of arable land, especially in China, is also seen as a key factor. In other words, a food security crisis leading to increasing prices is seen as being on the agenda.

Boardman argues that farmland is an asset class that has been overlooked by many investors. I am not so sure that is so true in the UK where interest has waxed and waned over the years with companies like Sentry Farming eventually pulling out of farm management. Boardman argues that in the US farmland has generated revenues exceeding 15 per cent per annum in the past five years, but part of that has been fed by the biofuels boom which is of questionable net environmental value. He also points out that the farming sector has low debt which is an attraction in the current crisis.

The sector produced a return of 31.7 per cent in America between June 2007 and June 2009, according to the National Farming Index. Over the same period the S&P 500 index declined 35.9 per cent.

Only a small proportion of American farmland, estimated to have a value of around $2 trillion, is owned by institutional investors. Boardman is confident that farmers will sell up: 'Farming is much more than a commercial choice than a lifestyle choice in America. A lot of these farmers are getting old and the next generation is not always interested in taking over these farms.'

In the UK farmland values in southern England have long been boosted by interest from the City. Sporting assets such as shooting and fishing are a key attraction, along with opportunities to stable and exercise horses. However, these activities may be undertaken alongside a commercially managed farming operation. There may be inheritance tax advantages in investing in farmland.