Olive oil crisis hits Southern Europe

Unwanted surpluses are a recurrent problem of the CAP. And now the troubled Southern European countries have been hit by a surplus of olive oil, driving down prices to uneconomic levels. Domestic consumption of the diet staple has fallen because of the economic crisis: in Greece and Italy it has fallen to 1995 levels and in Spain to 2002 levels. At the same time there has been a bumper crop in Spain. The price of premium extra virgin oive oil fell this month to $2,900 a tonne, the lowest since 2002 and down more than half from nearly $6,000 a tonne in 2005.

Spain, Italy and Greece account for some 70 per cent of the world's output. The crop is crucial for some of the poorest regions of Spain including Andalucia, where the unemployment rate was 33 per cent last quarter. Urged on by farmers' union Copa-Cogeca, the EU has started to pay companies to stockpile oil.

Intervention buying was one of the worst features of the old style CAP. It costs money to store the produce and often it deteriorates in quality over time. One then faces the problem of how to sell it without causing market disruption. In the past 'ageing' butter was sold to grateful consumers in the Soviet Union while skimmed milk powder was dumped on third world countries, driving local dairy farmers out of business. Such outlets are not available for olive oil.

Green confusion

Agra Europe reports that support has been building in recent weeks for the idea of member states being offered a menu of options for the ‘greening’ of the CAP post-2013, with a majority of member states backing the plan. But EU farm commissioner Dacian Ciolos took the opportunity at last week’s Farm Council meeting to speak out against taking this route, pushing instead for the principle of greening ‘equivalence’.

Ciolos argued that if member states were allowed to effectively pick and choose which environmental actions would be eligible for the ‘greening’ component of the new direct aid scheme, there woud be a risk of creating an unequal state of affairs across the bloc. Some actions which certain member states may deem appropriate for their particular situation may be more or less ‘beneficial’ to the environment than those implemented in others, for example. An alternative view would be that such an approach is compatible with the notion of subsidiarity.

The proposed menu option, which also drew the ire of environmental groups last week, goes against Ciolos’s ideal that 'quality and consistency' should apply across the EU27 when it comes to the next CAP. The three EU-wide measures that the Commission is proposing for the ‘greening’ elements of the direct payment scheme might also be seen as fitting better with the Commission’s push for 'simplification' of the CAP.

This disagreement between the Commission and member states highlights the fact that the EU farm sector is not as united as the Commission no doubt hoped it would be at this stage. But with 27 diverse member states with differing climates, farmland types and political systems around the table – and against the backdrop of one of the worst financial crises Europe has ever seen - the Commission will almost certainly need to show some flexibility. Or to put it another way, there will have to be another messy and incoherent compromise in order to secure agreement.

These greening proposals have always been ill thought through in my view and risk a lose-lose outcome of damaging farm businesses whilst not helping the environment.

Have farmers less to whinge about?

Sometimes I think that Farmers Weekly should be called Whingers Weekly. Often it's the weather - too hot, too cold, too dry, too wet. Admittedly, it is a challenge in the UK's variable climate. Then it's often prices (where dairy farmers have real concerns) or late payment of subsidies. After that it's vegetarians, defenders of the badger and opponents of GM crops (both of the latter two go way over the top on many occasions). Or it's retailer power, and that's where I have real sympathy with farmers. Let's hope the new supermarket ajudicator makes a difference.

Anyway the NFU has launched a new campaign to boost the image of British farming. Apparently the president is going to emulate the Jubilee by going up the Thames in a farm themed boat to the House of Commons: Farming

Last year farming was one of the most profitable industries in the UK, lifting aggregate net profits 25 per cent to £5.7bn. Measured against other sectors only mining and oil saw bigger growth according to UBS, the investment bank. Of course, farming can have bad years as well as good and not all sectors are doing well, but it does lead one to wonder whether such large blanket subsidies are needed.

As NFU presiden Peter Kendall points out, modern farms make a great deal of use of ICT and 'It's now a high-tech industry, not the way it was 10 years ago.' Pardaoxically, consumers may like a more bucolic image, but then they also want a ready supply of cheap food.

The good times may also be over before they beagn. Farming is fossil fuel intensive and in the long run prices are likely to rise in real terms despite the current dip. Farmers do, of course, pay a lower level of duty on 'red' diesel (sufficiently lower to lead to its occasional illegal use). Supplies of grain are rising which is likely to depress prices. Turmoil in the eurozone may hit exports and the rise in the value of the pound will reduce the amount received in subsidies. However, demand for food is likely to continue to rise, pushing up prices.

Hollande appoints farm minister

One of the first appointments made by President Hollande’s prime minister Jean-Marie Ayrault was to make current MEP Stéphane Le Foll the country’s new farm minister.

A close ally of Hollande, Le Foll’s appointment may prove to be an extremely shrewd move by the new French president as the Socialist MEP has been heavily involved in scrutinising the European Commission’s CAP reform proposals as part of the Parliament’s agriculture committee and is a substitute for the budget committee. I have seen Le Foll in action myself when I have given evidence to the agriculture committee and he is clearly very smart.

Le Foll has also authored a report calling for measures to help EU agriculture adapt to the effects of global warming. It is likely that he will push for a stronger ‘greening’ element at the CAP negotiating table, which will not please some British farmers, as well as a fairer distribution of aid among member states. Of course what is 'fair' is very much in the eye of the beholder.

Backlash against open government

It's no real surprise that there has been a backlash against transparency and open government in the CAP and that the group at farmsubsidy.org who try to shine light in dark corners are facing greater difficulties following court cases: Transparency

Revealing details about payments to individual farm businesses discloses how much some large businesses and food processing firms are receiving from the taxpayer. The bigger you are, the more you get. Of course, it could be argued that the CAP is a very inefficient way of delivering income supplements and that if it is there to promote competitiveness, more is likely to go to bigger farms which tend to be more efficient (and also have a better record in areas like animal welfare).

If one was designing the policy again today, we wouldn't end up with what we've got. But we are constrained by starting from where we are in trying to make reforms.

Greening proposals watered down

Agra Europebroke the news last week that member states are demanding greater flexibility when it comes to the ‘greening’ elements of the proposals for the CAP post-2013.

It has now reported that the proposal for an alternative ‘menu’ with a range of options was said to have been warmly welcomed by a majority of states at a subsequent Special Committee on Agriculture meeting. This could mean that the European Commission’s much-vaunted plan to tie 30 per cent of direct payments to just three EU-wide ‘greening’ measures from 2014 is dead in the water.

As the influential CAP commentator Chris Horseman has argued, it could be said that by not making crystal clear the purpose of ‘greening’ the direct aid payments to farmers under Pillar 1, the EU’s decision-makers have allowed the more influential member states to grasp the nettle and shape a more politically-palatable proposal in its place.

Although the new menu proposal is almost certain to be more acceptable to member states, it is unlikely that they will allow for a more environmentally-sound policy than the original ‘greening’ measures put forward by the Commission and environmental groups such as Birdlife International have already made their feelings known, claiming it will mean 'Europe’s most environmentally harmful farmers to get away without changing anything.'

However, it is arguable that the original proposals were too inflexible and would simply create transaction costs without a favourable environmental outcome. It is not easy to devise cost effective policy instruments for agri-environmental policy that also avoid the 'additionality' problem, i.e., paying farmers for doing something they would have done anyway. Many farmers do see themselves as trustees of the land they own or rent on a long-term basis.

However in the UK the practice of taking on additional parcels of land away from the main farm to make it a commercially viable unit may not help this notion of stewardship.

Amid the wreckage

Alexander Stubb, Finland's EU affairs minister, is quoted in the Financial Times as saying. 'The worry I have in the whole European debate - and we have seen it in the French presidential elections, we see it in the Netherlands, we have also seen it in Finland - is that some fundamentals of European integration are under attack. They include Schengen, the ECB, the euro, the internal market and trade policy. And you know, if we take them away, what's left?

The short and unfortunate answer is the Common Agricultural Policy which still dominates the EU's budget. There is a certain irony in the possibility that among the wreckage of European policies, the CAP would be left standing. Arguably it is the most dysfunctional of the EU's policies.

Stubb, by the way, is a self-confessed EU nerd. Intrigued by his English-sounding name, I found that he went to high school in Daytona Beach, Florida, took his first degree in the States and has a PhD from LSE. Read more here: Stubb

Completing CAP reform on time

In this week’s issue of Agra Europe, editorial director Chris Horseman, who is one of the most experienced and knowledgeable observers of the CAP, suggests that the deadline of January 1, 2014 for the new CAP could be missed unless EU leaders can conclude the Multiannual Financial Framework negotiations by the end of this year.

Horseman argues that the crux of the problem is the fact that MEPs have taken the view that they are not in a position to pass judgement on how CAP spending should be allocated in 2014-2020 if they do not know how much overall spending will be available. Therefore, the need for their Council counterparts to agree a financial framework to provide funds for the Single Farm Payment system becomes an imperative.

However keen the European Commission may be to keep the negotiations on the reform of the CAP and on the future MFF technically separate, the two issues are politically inseparable, Horseman says, before exploring the ramifications and potential scenarios instigated by the deadline for CAP reform being missed.

It has been my view for some time that the deadline would be missed and that January 2015 was a more likely date. It has also been my view that the involvement of the European Parliament would slow down the process and make reform more difficult to achieve. The requirements of a democratic process mean that it should be involved, but the effect on outcomes may be less desirable.

The crux of the issue is that when European domestic governments are practising austerity, and are likely to do for some time to come whatever the calls for a growth strategy, it becomes increasingly difficult to justify the share of the EU budget devoted to the CAP. There is a high 'opportunity cost' in terms of money that could be spent on infrastructure projects that would help employment and research and development that would enhance Europe's flagging competitiveness.

Even within the farm budget there is a strong case for spending more on applied research which would help European agriculture to meet food security challenges in a sustainable way much more than blanket subsidies.

CAP reform proposals 'too complex'

The Court of Auditors has published a report arguing that the proposed CAP reforms are too complex and will not achieve the desired aim of simplification. They might not end the controversial practice of 'sofa farming'.

The Court recognises the efforts made by the Commission to simplify the provisions of the CAP and to address a number of observations made by the Parliament, the Council and the Court. However, the Court considers that the legislative framework of this policy remains too complex.

For example, six distinct layers of rules govern rural development expenditure. With respect to cross compliance, the Court considers that, in spite of the proposed reorganisation, the complexity of this policy continues to make it difficult for paying agencies and beneficiaries to administer.

In spite of the claim that it focuses on results, the policy remains fundamentally focussed on spending and controlling expenditure and therefore oriented more towards compliance than performance. In particular, the specific objectives of direct payments to farmers are not set out in the articles of the relevant regulation, nor are the expected results of those provisions or the type of indicators to be used to measure such results.

With respect to rural development, the Court has underlined the importance of setting out specific concrete objectives that the proposed measures are designed to achieve and of ensuring that support is targeted to rural areas where the aid is most needed. Similarly, the objectives and qualitative and quantitative results that are expected of the implementation of cross compliance obligations as well as of the ‘greening’ component of direct payments are not adequately laid down. The disclosure of such objectives would help focus the policy on delivering the desired results.

The Court has noted the Commission’s intention to direct CAP payments to “active farmers” and to achieve a more balanced distribution of direct payments among beneficiaries. However, the Court considers that the risk persists that payments may continue to be made to beneficiaries who do not exercise any agricultural activity. Furthermore, the Court notes that the redistribution effect of the reduction of the amount aid when such aid exceeds certain levels (“capping”) will be limited.

Furthermore, the Court has doubts as to whether some of these proposed measures can be implemented effectively without imposing an excessive administrative burden on national managing agencies and on farmers. As a way out of this difficulty, the Court suggests adopting a general and simple definition of what constitutes an “active farmer” and to entrust the Commission with the task of managing the implementation of the resulting legislation with a view to reaching the high level objectives set out in the Treaty. These objectives are to increase agricultural productivity as well as increasing the individual earnings of persons engaged in agriculture.

The Court notes that the Commission estimates that the proposed reform is likely to result in an increase of 15 per cent in the costs of managing the direct payment schemes which will be borne by Member States. The Court notes that no information is available on the extent to which such additional costs might be offset by increased management or policy efficiency.

Accession state farmers get little money from CAP

96 per cent of direct payment beneficiaries in the new member states received no more than €5,000 in the 2010 financial year according to Commission figures. The average amount in the EU-12 was €1,550 per farmer. In overall terms 80 per cent of farmers received 20 per cent of the payments. It should be noted that payments are still being phased in in the new member states.

Just over 60 per cent of European farmers received less than €1,250, although quite a few of these would be part-time farmers. Nearly 4,000 received more than the proposed cut off point of €300,000. 1,660 of them were in Germany, 390 in the Czech Reoublic, 330 in Spain and about 310 in the UK.

The Commission notes that 'the direct payments have lost their compensatory character over time' (which is how they were justified at the time of the MacSharry reforms) 'and have increasingly become a support ensuring a certain farm income stability and in combination with cross-compliance, promoting sustainable farming activity.'

If the objective is to stabilise farm incomes, Single Farm Payments are an inefficient way of doing it and a blunt instrument to promote sustainability.

More regulation urged in French presidential election

One would not expect candidates in the French presidential election to advocate less spending on the CAP or looser regulation, but there are significant differences of emphasis.

President Sarkozy said that he would focus his efforts if re-elected on improving the competitiveness of French farmers. 'Farmers are entrepreneurs, they want to live from work, not from direct aid.' he said.

One might question how far the CAP in its current form encourages them to be enterprising. However, Sarko was clear that France 'would fight against all attempts to reduce the CAP budget.'

Francois Hollande said that basing aid on farm size was unfair to specialist producers who had holdings of only a few hectares. Aid should take employment on farms into account. Needless to say, some French producers would benefit.

He also said that there should be more regulation of supply, saying that there too few policy instruments and specifically regretting the phasing out of milk quotas as a regulatory tool.

Many commentators, of course, favoured getting rid of the rigidities which this system introduced and which did nothing to boost the international competitiveness of the EU's dairy sector. But then that is clearly not a concern for Hollande.

Subsidy cuts could be deeper than anticipated

The cut in single farm payment subsidies could be deeper than the anticipated four to five per cent according to Richard King of Andersons. He thinks that pressure on the EU budget could see the amount of money available through the reformed CAP reduced by twelve to fifteen per cent.

In real terms the loss would be even greater and farmers in Scotland and Wales could see bigger cuts as payments moved from an historic to a flat rate basis.

Snaller traditional family-run mixed farms were likely to be hardest hit by the cuts, as many relied on subsidy payments to get anywhere near making a profit.

Panorama programme causes controversy

A Panorama programme on Monday evening on farm subsidies has not surprisingly caused controversy: Panorama

I felt that the programme focused too much on the issue of 'sofa farmers' which admittedly makes for good journalism. If one is going to have subsidies, this arrangement is actually a second best solution as it allows farmers to convert their entitlement into a capital sum - although a bond scheme would do that more efficiently.

The programme also did not really tackle the contradictory objectives of the CAP. If it is a social policy, then it should be designed as such. But if it is intended to promote the competitiveness of EU agriculture, then it is not so inefficient to subsidise larger farmers who are generally more efficient.

14,500 farms would be hit by capping

Some 14 500 farmers or businesses in the EU could see their direct payment cut in two years’ time, new figures indicate.

Any farmer receiving a net entitlement of more than €150 000 in aid payments is likely to see their payment reduced under the Commission’s controversial proposals on aid ‘capping’. New figures from the EU, relating to 2010, reveal for the first time the extent to which farmers throughout Europe would be affected.

The figure also show that those 14 500 businesses received almost 11 per cent (€4.4 billion) of the total €39.7bn handed out to 7.79 million recipients. Around 4 000 farms got more than €300 000 each, netting more than €2.2bn between them.

Drones to police CAP?

A report has claimed that unmanned drones might be used to detect breaches of CAP subsidy rules: Drones

Satellites have been used in the past to detect attempts at fraud and they have had their successes as when a farmer tried to claim for fields located in the mid-Atlantic. However, their effectiveness can be affected by weather conditions and they do not work well in mountainous terrain.

Wine reform up for grabs

Farm commissioner Dacian Ciolos has announced that a high level group is to review the 2008 wine reform: Wine

Traditional wine producing states have been unhappy about its effects but it benefitted smaller producers like the UK which saw some bureaucracy removed.

Why the Indian wine market is not taking off

With its rising middle class one might expect a growing demand in India for quality wines. But the reverse is the case. Wine volumes fell 15.7 per cent between 2009 and 2010.

China offers a stark contrast. It imports 2.5m cases of Bordeaux a year. India imports only 100,000 cases of wine a year. More is sold to the Maldives which are, of course, a major destination for western tourists.

In the UK consumption per adult of wine is 27.7 litres a year; in China it is 4.5 litres a year; and in India 0.01 litre a year, the equivalent of two teaspoons. Indians also consume less beer, barely one litre per person per year, compared with 23 litres in China, slightly above the world average.

The biggest obstacle to more sales is price which is the result of a punitive tariff on imported wines and spirits of at least 150 per cent. On top of that individual states apply their own taxes which range from 30 to 100 per cent. Gujarat, a state with one of the fastest growing economies, bans the sale of alcohol altogether. Labelling requirements are another obstacle to distribution.

A bilateral trade agreement with the EU is supposed to tackle the issue but talks have been dragging on since 2007 and no deal is in prospect. Mahatma Gandhi's austere doctrine still carries some weight and the government is concerned that cheap alcohol might blight the lives of poor people.

Indian wine has not enjoyed a good reputation, although the Mogul empire in 16th century India was supplied with wine from the High Indus Valley and Afghanistan. Quality wine production has increased with the support of subsidies and low-cost loans, but this has led to an over supply problem.

No deal before French and German elections

No deal on CAP reform will be reached until after the French election in 2012 and the German election in 2013 according to Defra minister Caroline Spelman speaking at the Oxford Conference. She also said that Britain was reaching out beyond its traditional allies in Scandinavia and the Netherlands to countries such as Slovakia and Romania to build an alliance against the 'capping' of CAP payments to large farms: CAP reform

Opinion at the Oxford Conference and in polls of farmers was sharply divided on whether British agriculture could flourish outside the EU.

How would you spend your £200?

Each of us spends on average £200 on the Common Agricultural Policy. How would you spend your £200. Try the interactive survey here: Survey

The European crisis, Britain and the CAP

The outcome of the eurozone crisis remains unknown, although none of the measures taken so far have really tackled the fundamental problems of sovereign debt and structural uncompetitiveness in Southern Europe.

What effects will the exercise of the British 'veto' have on attempts to reform the CAP? NFU policy director Martin Haworth is one of the most experienced individuals in agricultural politics and policy and he told Farmers Weekly that only time would tell if Britain would be marginalised in Europe and hence have less influence on a range of issues.

He made a distinction between Britain's largely unsuccessful attempts to secure CAP reform and broader efforts on regulation. He noted, 'The UK has pursued CAP reform policies ... which have pursued UK negotiators on the margins of the debate, so it is unlikely that Mr Cameron's actions will change the way in which the UK is already viewed with regards to CAP.'

'However, on broader regulatory matters where the British voice has been heard in recent years, for example on environmental and market regulation matters, Mr Cameron's actions may affect Britain's influence in the EU.'

The NFU is concerned about a scenario in which agricultural powers were repatriated to the UK, although Eurosceptics have focused mainly on various forms of labour market protection and the Common Fisheries Policy.

A NFU briefing document states that 'A worst-case scenario would see the UK remaining in the single market but regaining autonomy over support arrangements.' The NFU fears 'That would allow the Treasury to achieve its long-standing goal of removing direct payments altogether.'

Supposing Britain left the EU or repatriated CAP payments, the withdrawal of subsidies overnight would cause chaos in agriculture. In principle one might want to see a return to a deficiency payments system which was the more market attuned form of subsidy that existed before Britain joined the EU.

However, in practice, it would be costly to dismantle the existing (albeit rather inefficient) administrative apparatus and replace it with a new one. One would therefore have to pay farmers the SFP on an historic basis, tapering the amount paid over time so that one might start at 90 per cent of the existing payment.

More radically one could compensate farmers for the subsidy by issuing them with interest bearing bonds which could also be sold on the market but that would probably be unacceptable to the parties involved.

Meanwhile British farmers who had opted to be paid in euros have been converting them into pounds on the spot market rather than waiting for a more favourable rate (which, of course, might well not materialise).

It is generally larger farmers who take payments in euros and they usually have some form of relatively sophisticated risk management in place, including hedging.

The crisis has also injected some uncertainty into the market that trades in English Single Farm payment entitlements. If CAP reform is not agreed in time for the 2014 claim, which in my view is more than likely, the purchase of entitlements now would give buyers access to claims for the years of 2012, 2013 and 2014 for little more than the value of one year's SFP.

Leading broker Webb Paton is reported to be doing about 15 deals a day. The existence of such a secondary market might seem to be perverse but, given that we have farm subsidies, it is a 'second best' solution that facilitates their more efficient allocation.