Not so sweet?

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

What does the budget mean?

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

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

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

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

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

Real term cuts in CAP budget

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

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

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

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

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

Farmers' unions accept CAP budget proposals

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

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

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

China goes nutty

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

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

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

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

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

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

Initial win for France

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

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

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

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

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

Why lack of data affects food prices

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

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

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

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

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

Sarko's regulation crusade makes modest progress

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

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

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

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

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

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

Threat to biodiversity funds

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

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

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

A risk management toolkit?

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

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

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

Justifying farm subsidies

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

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

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

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

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

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

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

France uses E.coli scare to boost CAP

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

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

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

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

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

MEPs side with Commission

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

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

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

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

Disciplining agricultural support

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

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

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

Is a radical approach to CAP reform off the agenda?

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

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

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

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

Commission insists on transparency

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

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

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

Defra no longer in charge of CAP reform

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

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

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

What impact will co-decision have on CAP reform?

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

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

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

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

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

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

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

'Greening' of CAP on its way

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

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

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

Farmers' fuel tax break under threat

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

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

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

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