Dual blast on CAP from Court of Auditors

The Court of Auditors has delivered a dual blast at the CAP. The first report considers the £2.5bn of spending a year on agri-environmental schemes. It argues that poor design makes it difficult to assess the extent to which agri-environmental schemes achieve their goals: Agri-environmental

The Court found that objectives set by the member states were numerous and not specific enough for assessing whether or not they have been achieved. Although the environmental pressures are identified in rural development programmes, they cannot be easily used to provide a clear justification of agri-environmental payments.

There were considerable problems about the relevance and reliability of management information. In particular, very little information was available on the environmental benefits of agri-environmental payments.

The report is significant given the declared intention to 'green' the CAP in the next stage of reform.

In a report just released the Court has criticised the mechanism used by the European Commission to recover undue payments made under the EU's €55 billion-a-year Common Agricultural Policy (CAP): Recovery

The ECA found that 90 per cent of the amounts listed as recoveries in the EU's annual accounts represented reimbursements from national budgets rather than actual recoveries from CAP beneficiaries. Its report says that while this approach protects the financial interests of the EU, it diminishes the deterrent effect of recovery from beneficiaries.

Following an earlier report in 2004, changes implemented in 2006 had improved matters by providing more accurate information and greater detail on debts and recoveries at member state level. However, the system had certain shortcomings such as running the risk of encouraging the write-off of debt as early possible or reporting debt as late as possible.

There were also, not surprisingly, variations in the conduct of member states. This meant that debts were recognised at different times, reported figures were not comparable, interest was applied inconsistently and the point in time at which debts could be witten off varied significantly. All of this had a negative financial impact on the EU budget.

OECD calls for farm subsidies to go

The OECD is arguing that currently relatively high farm prices provide a window of opportunity to scrap farm subsidies: OECD

If only it were so, but the underlying politics does not permit it. Farmers will point out that input prices have also risen and mobilise food security arguments to justify the need for subsidies. Veteran Farmers Weekly columnist David Richardson is even waving the threat of food rationing in the latest attempt to alarm politicians and consumers.

In fact the rise in commodity prices has reduced the share of farm incomes that comes from subsidies. Across the OECD countries this fell from 22 per cent in 2009 to 8 per cent in 2010. It is consistent with a long-term declining trend.

This is not because subsidies have been cut in response to the fiscal crisis, but because of a reduction in countercyclical payments. Even so the 34 OECD member countries spent $277bn last year subsidising their farmers. Subsidies account for about 9 per cent of US farmers' income, but the figure is 28 per cent in the EU.

China has jumped on the subsidies bandwagon. The amount paid out last year went up to a record $147bn, an increase of 40 per cent on the preceding year. This pushed the share of Chinese farm income drawn from subsidies to 17 per cent, near the OECD average of 18 per cent. Direct payments to grain farmers in China have been consistently increasing since their introduction in 2004.

Britain and Poland have issued a joint statement calling for CAP reform and in particular less emphasis on Pillar 1. Poland joining the reform camp is a step forward, although it is interesting that one of the stipulations is a convergence of direct payments across the EU. See more here: Poland

Sugar quotas to go

The EU is to end sugar quotas and guaranteed minimum prices in 2016. This represents a one year extension after the scheduled end to quotas to give producers more time to adjust: Sugar

It is hoped that the change will boost output and reduce prices by as much as 8.2 per cent. It will also align the EU more closely with world markets, boosting exports and reducing imports.

It has a taken a long time to reform the sugar regime, but this is another step towards a more market oriented system.

Greening element in CAP reform increased

The European Commission is proposing to increase the greening element in the CAP reform in relation to Pillar 1 measures: Greening

The proportion of farmland to be placed in ecological measures would be increased from the previously proposed 5 per cent to 7 per cent. Such features include fallow terraces, landscape features, buffer strips and afforested areas.

It is also proposed that farmers should grow a third arable crop covering at least five per cent of their farmed area. This seems to be an intervention in commercial judgments by the farmer which may not bring commensurate environmental benefits despite concerns about monocultures.

Needless to say, farming unions are not happy with these proposals which they are presenting as a threat to food security.

Farm incomes up

Farm incomes are up in the EU, but there is considerable variation across member states. EU farm incomes jumped by almost 13% last year, thanks to higher crop and milk prices, but the UK was among just seven member states to see a drop.

The biggest increases in earnings are attributed to Denmark (an astonishing 57% higher), Estonia (+46%), the Netherlands (+39%) and France (+34%). The UK, however, recorded income 6% lower than a year earlier. It should also be noted that key input prices such as fuel and fertilisers have been on an upward trend.

In the UK's case, exchange rates have been a significant factor. The 2010 statistics reflect a decline in the exchange rate at which payments through EU direct aid schemes were converted from euros to sterling. In the UK, this meant a fall in the value of the Single Payment Scheme and other payments of some 12 per cent.

Interestingly, the statistics reveal that a mere 15% of EU farmers claim 85% of CAP subsidies.

The same figures also show that farmers in general are still relying heavily on CAP subsidies – Pillar One and Pillar Two funds made up 42% of farm incomes last year, up from 39% in 2008. This shows a worrying dependence on subsidies and illustrates why it is so difficult to dismantle them or even reduce them substantially.

Farm subsidies face cut in US

There's nothing like a budget crisis for focussing the mind and it looks as if farm subsidies in the US may be facing cutbacks, even the politically well entrenched cotton subsidy: Subsidies

Quite how those pressures will play out in the tortuous EU budget process is another matter. In the US there is a direct trade off with spending on health and education. In the EU these are domestic budgetary responsibilities.

France seems confident that the existing budget can be defended, but there may well be some trimming.

Birdlife International critique greening delivery mechanisms

Birdlife International have understandably welcomed the Commission's stated intention to devote 30 per cent of Pillar 1 funding to 'greening' the CAP. They think that it could make a real difference in terms of the delivery of public goods by the CAP.

However, as always the devil is in the detail and they think that some of the proposed policy instruments are not fit for purpose. Indeed, on a scorecard they fail six of the twelve and give an 'unclear' rating to the other six.

Read their report here: Birdlife

Defra tries to revive reform coalition

Defra is trying to revive a coalition of support for radical reform of the CAP, holding meetings with Sweden and Denmark: Reform

Of course any coalition would need a broader base of support. In the past the Netherlands has joined in and at one time a particular political conjunction in Italy which no longer exists attracted their support. Liberally oriented former Communist states might also be supporters, but they will be hoping to get higher payments out of any settlement.

In any case the real obstacle to reform is the determination of France to maintain subsidy and protection. It usually has the support of Germany as part of broader political trade offs.

Of course, if the eurozone crisis deepens, as it threatens to, all bets may be off.

Storm of protest greets 'capping' plans

A storm of protest from farmers and their representatives has greeted the leak of European Commission plans to cap Single Farm Payments (SFPs) to large farms. The proposals should have come as no surprise as the Commission sets out to meet imperatives to cut the CAP budget and make it superficially fairer. However, critics say that the move undermines the international competitiveness of EU agricultire.

Under the leaked proposals individual farmers receiving above €150,000 (£132,000) in payments would lose 20 per cent of that support with the amount increasing proportionately for those raising larger sums. There would be an overall limit of €300,000.

The cutbacks would not apply to the so-called 'greening' element of Pillar 1. They would also take account of farms with large workforces through a so-called 'salaried labour intensity' indicator. However, most large farms are relatively capital intensive and make extensive use of contractors who presumably would not count.

The Commission intends to introduce legislation to close a loophole that might be available to farmers by splitting up their holdings into separate legal entities or transferring payments to relatives. Some of them may have already done this or still have a period of grace to do so.

In a sense this is a shift in the direction of confirming that the CAP is essentially a social policy for marginal farmers. Competitiveness is a formal objective, but has always been given relatively little attention.

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.