The GM debate

This continues to rage on with entrenched positions being taken on either side. However, this interesting post argues that we shouldn't treat all GMOs alike and that we now have a good enough knowledge base to make informed judgments: GMOs

UKIP and the CAP

It is perhaps not surprising to learn that their agricultural policy is not particularly coherent and they are clearer about what they are against than what they would replace it with, but here is an interesting account of their policy stance on agricultural matters: UKIP

CAP reform deal not yet sewn up

This week’s Farm Council meeting highlighted more of the divisions that remain on the CAP reform process than many observers, not least the EU Farm Commissioner and Irish Presidency, would have liked, reports Agra Europe. This meeting was significant in that it was the last opportunity for an agreement between EU agriculture ministers prior to what many are billing as the ‘final showdown’ talks at the Luxembourg Farm Council on June 24-25.

The three big points of discussion were over the nature and scope of the new support systems for ‘young’ and ‘small’ farmers under the next CAP, as well as whether or not an ‘active farmer’ provision – aimed at excluding ‘undeserving’ recipients from receiving subsidies through an EU-wide ‘negative’ list that countries could add to – should be mandatory across member states.

The issue of whether young farmers should be given a 'leg up' has proved controversial for the UK. As for undeserving recipients, subsidy transfer arrangements represent a second best solution offering reallocation in an inherently unsatisfactory system in my view. Interestingly, despite the Presidency testing the water for potential compromise agreements on these issues, many governments were steadfast in their opposition in making the first two schemes compulsory to top-up direct payments, while there was also much disagreement over the third provision.

Simon Coveney, the Irish agriculture minister chairing the member state government talks, came away from the Council stating that he was 'reasonably positive' that compromises on the three proposals can be reached with MEPs and the Commission by the end of next month. Commissioner Dacian Ciolos was also confident of a political agreement but at the same time he reiterated his frustration at the reluctance of several ministers to accept a 'common' and compulsory approach for the targeted schemes.

UK farm minister Owen Paterson, who is engaged in his own battle to defend the Defra budget, also said he was optimistic of a deal this week, but there have been whispers that an agreement may not be as cut and dry as is hoped, with measures such as ‘greening’ likely to be major stumbling blocks. Scottish Liberal Democrat MEP George Lyon even suggested that the Irish Presidency may be given additional time to try and get a deal in July.

Although Lithuania will have taken over the EU Presidency for the first time in their history by that time of year, the view is that the Irish will be best-placed to secure an actual CAP reform agreement due to being relatively more experienced in such matters.

Farmers and the EU

Yesterday I spent a very interesting day in Yorkshire talking with a cross-section of farmers. As always, it was good to hear of the ingenuity that farmers deploy in diversification such as an upland sheep farmer who was producing honey using the summer heather crop, a bit hit with consumers. Another interesting point to come out of the discussion was that many farmers, perhaps egged on by banks, had gone for increasing the area of their farms and had not thought enough about how they could improve productivity on existing land, e.g., by grassland improvement which could yield gains of 50 to 100 per cent.

Many different topics came up, the availability of plant protection products being a particular concern, but among other things we discussed Britain's membership of the EU. There was concern about EU regulations, particularly from the poultry sector, in terms of whether they prevented British farmers from enjoying a level playing field in terms of competition.

When I said 'many' farmers could not survive without the single farm payment, I was corrected by the word 'all'. If this is the case, it is worrying in terms of the viability of British farming. But I accept that the availability of the SFP is built into business models and can make the difference between profit and loss. An arable farmer did emphasise that most farmers would prefer to earn a living from the market if they could get a fair price and this led us into a discussion of the economic power of the supermarkets.

It is quite likely that we will have a referendum on Britain's continued membership of the EU: Labour would be disadvantaged at the next general election if it was unable to offer this. It is also quite likely that the vote would be to withdraw. In terms of the single market, a lot would then depend on whether a satisfactory association agreement could be concluded with the EU. European countries have an incentive to do so given the exports they make to the UK, but the devil would be in the detail.

But what would happen to farm subsidies? It would be an opportunity to think again about what the objectives of such subsidies should be, and also to reduce them. One of the problems with EU policy has been that the objectives in the Treaty of Rome were contradictory, had no preference ordering (although one appeared in practice) and were never changed in treaty revisions (too much of a hot potato).

What could be done is to pay farmers a tapering percentage of their historic SFP, say 90 per cent in the year after exit and 80 per cent in the second year while there was a serious conversation about what sorts of subsidies were needed, for what purpose and how they could be reduced over time. Indeed, farmers could be offered a buy out of their subsidies through a bond scheme.

Greening remains big issue in CAP talks

The general feeling from last week’s Farm Council and subsequent ComAgri meeting was that there needs to be more compromise from all sides in the forthcoming trilogue talks between the European Commission, Parliament and Council if they are to get the job done at the June 24-25 Farm Council as planned, reports Agra Europe

‘Greening’ remains one of the key talking points, with environmental groups again urging decision-makers not to ‘green-wash’ the CAP earlier this week, but many MEPs are still wary of the ‘double payment’ quandary should 30% of Pillar Two direct payments be linked to these measures.

Greening itself has not yet been tackled in the trilogues, yet EU Farm Commissioner Ciolos reiterated last week that an ‘equivalence’ system must be 'credible' and 'avoid double funding'. The measures must be 'clearly defined' and constitute a 'clear baseline' for Pillar Two agri-environment schemes, he added.

In England the concern among farmers is that Pillar Two measures will be maintained at the expense of the Single Farm Payment.

Commodity trading houses under fire

Commodity trading houses are secretive, largely unregulated, pay relatively little tax and, until recently, have made big profits. Not surprisingly, they have come under increasing scrutiny with the Financial Times headlining a major investigation on Monday ahead of its global commodities summit which was marked by an anti-industry protest. NGOs argue that their speculative activities increase volatility, creating more uncertainty for farmers, and force up prices for consumers. They also reinforce asymmetries in north-south relations. For a special issue of Food Ethics on this subject go here: Food Ethics

Leading commodity houses such as Cargill are reacting by saying they need to be more transparent about their activities. But there is a tension there, because it is having an information edge in relation to supply and demand patterns that enables a commodity house to trader profitably. Their defenders would argue that they enable the market to work more efficiently by clearing the market and helping price adjustments. They link regions of surplus and deficit around the world.

Commodity houses cover a number of sectors of the economy including minerals, metal and oil, as well as agriculture. According to the FT, the net income of the largest trading houses since 2003 surpasses that of the combination of mighty Wall Street banks Goldman Sachs, JP Morgan Chase and Morgan Stanley, or that of an industrial giant such as General Electric. They made more money than Toyota, Volkswagen, Ford Motor, BMW and Renault put together. However, times are now more difficult, particularly since the recent drop in commodity prices. Aggregate profit growth has stalled.

When I have attended specialist agriculture conferences, someone from Cargill is often there, but they generally keep a low profile. Probably their own data is better than that being presented. William Wallace founded Cargill in 1865 as an Iowa grain elevator, but it now operates in 65 countries, employing 140,000 people. The company is privately held by about 80 of Wallace's descendants, although staff have a 17 per cent stake. It is by far the world's largest trader of agricultural commodities, a turning point being when it bought rival Continental in 1998. It has the biggest market share in key raw materials such as sugar, corn and wheat, putting it in a position to be a price maker rather than a price taker.

Cargill's name is well known, but there are also less known companies in niche markets. For example, the Hamburg-based family-owned Neumann Kaffee Gruppe is behind the beans that go into one in seven cups of coffee worldwide. Swiss-based trading house Ecom Agroindustrial mills more coffee beans than any other company. According to the World Bank, its clients include Starbucks and Nestlé. Company turnover in 2011 was in excess of $4 billion.

The sector is largely unregulated. Switzerland, the main hub of these companies, has admitted that 'Physical commodities traders are, in principle, not subject to any oversight.' The tax burden is low. According to the FT, they pay less tax than oil or mining groups or Wall Street banks.

But the growing level of scrutiny is ringing alarm bells. Cargill has warned that trading houses must embrace ethical and transparent business practices or risk getting into hot water with regulators.

Hoovering up farmland

Sir James Dyson has bought up thousands of acres of Lincolnshire farmland, reports Farmers Weekly. He is believed to have paid some £150m for more than 6,800 ha./17,000 acres through a new company Beeswax Farming (Rainbow) Ltd. He has purchased much of the Norton estate which was destined to be Britain's largest dairy farm until the plan was defeated by animal welfare activists, backed up by objections from the Environment Agency.

There's nothing new about wealthy investors or even institutions buying up farmland, indeed the institutitional involvement has been greater in the past and led to a report. One of the advantages of owning farmland is that it does not incur inheritance tax. Some critics argue that farm land values are bumped up, making it difficult for 'genuine' farmers to expand or enter the market. Average English farmland values reached £22,500/ha (£9,100/acre) in the last three months of 2012. If you borrowed to buy at those sort of prices, you could not fund the lending out of farming.

There has been a fierce debate in Farmers Weekly about whether young farmers should be given a hand up the farming ladder if they are not going to inherit a farm. The general view seems to be against special subsidies, and indeed one would not want to create a new category of subsidy. Many would-be farmers have to settle for being a farm manager.

One argument in favour of some form of subsidy is the ageing farm population, which applies across Europe. However, the figures may be somewhat misleading as the nominal head of the farm may be semi-retired.

One challenge has been the reducing number of county council farms available for rent. For many farmers these relatively small farms served as the first, but sometimes the last, step on the road. Like many farms, they survived by the farmer's partner working. However, many county councils have been selling off these farms to realise the capital.

Farming is hard work and demands a wide range of skills. The returns are often little better, or even worse, than the minimum wage per hour worked (although not on arable farms in Lincolnshire). Of my two nephews from a Welsh hill farm, one has moved to Manchester where he pursues an urban lifestyle. The other works the farm with his father and evidently enjoys his way of life.

Life imitating art

The battle over the future of Bridge Farm in The Archers has been won by the hard headed business case over the more sentimental 'way of life' arguments associated with Pat Archer's affection for her cows. I thought that possibly the script writers were a bit behind the curve as in today's economic climate farms have to be run as a business. But I am also aware that farmers work very long hours in arduous conditions for returns that are often little better than the minimum wage, particularly on livestock farms.

It was therefore interesting to see a 'way of life' argument from a farmer who said that if money were the driving force he would be better cashing in and living off the interest (I don't think he would get much of a return at today's rates unless he moved into risky products). He took exception to remarks made by agricultural economist Sean Rickard who said that the weather was not to blame for small producers not being able to cope. The farmer argued that the weather affected everyone. That is true (subject to regional variations), but I infer that what Sean Rickard was arguing was that larger farms have a better capacity to cope with such events, e.g., they have more access to finance and better economies of scale.

Consumers are attracted by visions of the traditional family farm, but one also has to be hard headed about the financial dimension if the business is to survive and prosper.

Farmers face early SFP hit

Farmers are likely to face an immediate hit in their 2013 subisdy payments. 'If farmers budget the same as for 2012, they may be in for a nasty surprise,' warned Richard King, head of research at the Andersons Centre.

The proposed EU budget includes a 9 per cent in CAP funding. But one of the oddities of the system is that this year's single farm payment (SFP) will be based on the new CAP budget, but under the current SFP regime. The result could be a cut of about 10 per cent in the single farm payment. This comes at a time when many farmers have been hit by the unseasonable weather. This particularly applies to livestock farmers in higher areas who tend to operate on small margins.

The 10 per cent figure may be a little high, although Richard King insists that it contains a margin for safety. The Commission envisages a cut in single farm payments of marginally under 5 per cent (4.98 per cent) in 2013, equivalent to an overall cut of €1.47bn from the Pillar 1 budget of €44.1bn. This figure will have to be approved by the European Parliament. The cut is the first time that the 'financial discipline' included in the 2003 Fischler reforms has been triggered.

The difficulty is that farmers have become very dependent on subsidies to make a profit. This is the problem with subsidy dependency. Faced with cash flow problems, farmers have been borrowing more. Bank of England agricultural lending figures show farmer borrowing increased to almost £13.5bn for January 2013. This compares to £12.2bn in January 2012 and £11.7bn in February 2011 (albeit there is an inflation component in those figures).

One recommendation is that farmers should consider hedging at least part of their single farm payment to protect against exchange rate fluctuations. This could make thousands of pounds difference, but it is only an option for larger scale farmers.

Other farmers need to consider whether they want to stay in low margin businesses like dairying. There is a risk that if farmers sell their cows and machinery they may then be tempted to live on the assets while the capital value of the farm (if owned) deteriorates. They need an alternative business plan in place.

Fans of The Archers will note the controversy caused by Tom Archer's argument that Bridge Farm should stop milking its own cows and buy in the milk it needs on the market. Although the scriptwriters had the character put it tactlessly, he is right: milking cows is time intensive and the real money is to be made adding value to milk by making niche products such as organic ice cream and yoghurt.

The real difficulty for farmers is that they do not face a level playing field given the buying power of supermarkets. That is not going to change any time soon. But farmers need to recognise that subsidies are going to fall more in real terms than they have in the past.

Further cuts in direct payments?

CAP direct payments look set to be cut back even further than the recent level agreed by EU governments, it emerged this week, as the budget needs exceed the available funds. Agra Europe reports that the spending gap is due to the 2014-2020 funding cuts agreed by EU leaders in February, along with the need to fund a new 'Crisis Reserve' for emergency market measures under Pillar One and also the final stage of subsidy phasing-in for 'new' member states.

This is likely to lead to the first instance of the ‘financial discipline’ mechanism kicking in since its inception in 2003, as the European Parliament is treaty-bound not to accept a budget deficit. What happens next is somewhat uncharted territory. However, hard pressed farmers are likely to react angrily.

CAP negotiations overview

My views on the current state of the CAP negotiations can be found here: CAP reform

Not sure I agree with the headline, as I think there is still a long way to go in terms of getting a more functional CAP, although it is the case that I am in favour of more discretion being given to member states in terms of how they implement the policy.

The likely main sticking points in the trilogue negotiations are discussed in this video: Trilogue

Parliament good for democracy but not for decision-making

The CAP is such an important part of what the EU does, not least in budgetary terms, that the European Parliament had to be made a decision-making partner if the institution is to mean anything in democratic terms. The downside is that it makes the whole process of arriving at an agreement on reform even messier and more complicated than it was before. Moreover, those most directly involved tend to represent farm interests. The end result is likely to be a reform package that is more incoherent than usual, and that is saying something.

After marathon talks in Brussels earlier this week, EU member state agriculture ministers finally came up with a CAP reform negotiating position, reports Agra Europe in what can rightly be seen as a significant step forward for the process. The Irish Presidency should be praised for its persistence in getting a deal between member states done halfway through its term in office and hopes are raised for a final deal to be set in stone before the end of June this year. 25 of the 27 states were in agreement after the meeting – Slovakia and Slovenia chose not to support it – and this is a strong mandate to take forward into trilogue talks with the Commission and Parliament.

Compromises were made on all of the major aspects of the policy including direct payments, the single CMO, Rural Development and Financing and Monitoring. However, it is apparent that the agreement will not put to bed the matter of CAP reform as many Parliament rapporteurs expressed dismay at many aspects of the Council position. The fact that the farm ministers did not rule out the possibility of ‘double funding’ for farmers 'destroys the legitimacy potential of greening,' according to the Parliament's rapporteur on direct payments post-2013, MEP Luis Manuel Capoulas Santos.

Agriculture Commissioner Ciolos meanwhile said he is 'delighted a clear consensus exists for 30% of direct payments to be linked to a more sustainable CAP'. The greening measures would be of a 'mandatory' nature under Council's stance as, penalties for non-compliance would go beyond 30 per cent of the Pillar One subsidy, he stressed. Yet Italian centre-right MEP Giovanni La Via, the Parliament's rapporteur on the 'Horizontal' Regulation, claimed losing the greening component of payments would be 'a high enough penalty' for farmers not complying with the new requirements. In other words, he wants to water it down.

Paolo De Castro, the Parliament's agriculture committee chairperson, probably summed up best the current state of affairs. 'There are some areas where the Council followed the Parliament's lead and others where we will have to negotiate intensively,' he said. The ‘intensive’ trilogue talks between the European Council, European Commission and European Parliament are provisionally due to kick off in early April with a hectic schedule of meetings between then and the end of June, when it is hoped a final agreement will have been thrashed out. What sort of agreement it will be remains to be seen, but one fears that it will be watered down.

Parliament has its say

The European Parliament has had its say on the CAP reform process and, as predicted by Agra Europe last week, has largely backed the amendments proposed by its agriculture committee (ComAgri). The majority of MEPs backed the four ComAgri positions on direct payments, rural development, financing and market measures as the momentum towards a final agreement, potentially within the timeframe of the current Irish Presidency, gathers pace.

However, some hurdles remain. The Parliament vote largely proved that there is still work to be done before a deal that satisfies all member states can be reached. Parliament did back a number of key aspects of the Commission proposals such as the ‘capping’ of Pillar One payments as well as its plans on ‘active farmers’. 'Capping' would have implications for UK farmers in particular, a number of whom operate on a large scale.

Key vote in European Parliament on CAP

Next week, the European Parliament will get to vote on CAP reform and the compromises agreed by its agriculture committee (ComAgri) back in January. It would seem to be the opinion of the majority within European agricultural circles that some form of consensus will need to be found at the vote if the CAP is to be reformed in time for 2014, reports Agra Europe.

But what are the chances of an agreement being reached? There are still a number of hurdles to be overcome if a deal between member states is to be reached. The biggest sticking points appear to be over the ‘greening’ of the CAP and what this should constitute, the capping of direct payments, the speed at which the EU should oversee the convergence of Pillar One payments between member states and the scope of coupled aid.

ComAgri chairman Paolo De Castro says next week’s plenary will provide MEPs with the opportunity to ‘fix’ the problems with the CAP reform process. He conceded that his committee may have made some 'mistakes' when adopting its position earlier this year but the vote will provide the opportunity to write these wrongs. Meanwhile, other MEPs, such as German European People's Party member Elisabeth Jeggle have told Agra Europe that many of her colleagues will side with the ComAgri compromises next week.

10 per cent real cut in CAP budget

It looks as if the outcome of the EU budget negotiations might be a 10 per cent cut in real terms in pillar one for UK farmers and a 22 per cent cut in pillar two: Budget Outcome

A similar estimate of a 9 per cent in CAP expenditure in real terms, with an even bigger cut in rural development expenditure, is made by Oliver Lee of Andersons' Farm Business Consultants: Extent of cuts

It is interesting that he notes that this would bring CAP expenditure down to 39 per cent of the multi-annual financial framework, bringing it below 40 per cent for the first time. Given that it was over 70 per cent in the 1980s, this does show that incremental change can make a difference. But it is still questionable whether anyone starting with a blank sheet of paper would want to spend over a third of the EU budget on the CAP.

A typical CAP compromise

The Irish Presidency offered an alternative to the European Commission’s proposals on the convergence of CAP direct payments within member states at Monday’s Farm Council, and it seemed to go down well with most of those in attendance reports Agra Europe.

The Irish proposal, that would only require member states to move partially to uniform area-based direct payments by 2020, was backed by a majority of governments at the meeting, although Farm Commissioner Dacian Ciolos made it clear he opposes the plan, criticising it for a lack of 'ambition'. He has a point, as it is a typical CAP compromise on the lines of 'make me pure, but not yet'.

All member states are to move towards a uniform payment per hectare at national or regional level by the start of 2019, the European Commission said in its CAP reform proposals, with a transitional period to apply up to 2018. But many member states feel this suggestion is too drastic and the consensus seems to be that a slower pace of transition is required.

CAP reform assessed

Here is a thoughtful and detailed look at the CAP reform proposals from the slow food movement: Slow Food

In particular there is a detailed consideration of the greening proposals. Their general view is that the proposed reforms do contain some significant gains for sustainability.

CAP budget reduced in size

The EU Council finally reached an agreement on the Multiannual Financial Framework (MFF) after marathon talks last weekend and it did not make for good reading for those who wanted to see an increase or real terms freeze in CAP spending reports Agra Europe.

The CAP budget agreed for 2014-2020 will be nearly €16 billion below what the European Commission wanted at €362.79bn − €277.85bn for Pillar One and €84.94bn for Pillar Two (P2). This is provided it is passed in a straight Yes/No vote by the European Parliament – the first time this has happened – as mandated by the Treaty of Lisbon, which came into force midway through the current 2007-2013 MFF period.

Under the Council agreement, rural development spending will be €7.03bn less than proposed, but the blow is to be softened for many member states, who are to get a ‘special’ P2 envelope as well as their share of the remaining P2 pot.

What this represents is the first time a CAP budget has been reduced in size but also an unparalleled degree of flexibility for member states over how they shuffle the financial resources dealt to them. However, no member state is going to escape the fact that restrictions on agricultural subsidies and state spending will be in place for the next seven years at least as the CAP enters an age of austerity.

Sterling fall boosts farm incomes

The weakening of sterling against the euro over the past four months potentially boosts UK farmers' single farm payment subsidies by £240m. For every 1p/euro change in exchange rates, the UK's single farm payments alter by around £40m. SFP accounted for around 15 per cent of UK farm incomes and can be an even bigger slice of profits. For example, over half the profits at Cooperative Farms, the country's biggest farmer, are down to SFP.

Currency fluctuations also affect market prices with a 1p weakening against the euro adding £200m to UK farmers' total income. For example, a farmer producing a typical wheat crop should get about £18 a hectare more from wheat sales with the euro worth 6p more. That's nearly ten times the impact on that farm's SFP.

The downside is that inputs such as feed, fertilisers and sprays could now be 7 per cent more expensive in sterling terms, if all the currency effects are passed on. Machinery could also be more expensive.

France gives some ground

France, the EU’s biggest beneficiary of CAP funds, had previously been in favour of opposing to any cuts to the share of CAP spending and instead favoured a freeze at 2013 levels in nominal terms (meaning a real terms cut) – a view supported by other member states such as Germany, Spain and Italy. However, President Francois Hollande now appears ready to accept a reduction after addressing the European Parliament this week and claiming that his main priority for the summit is to ensure 'expenditure levels that preserve our common policies'.

CAP spending 'will be reduced' compared to the European Commission's spending proposal, he conceded, adding this will provoke 'difficult restructuring for a sector that is essential [for France]'. Hollande’s speech could well pave the way for an agreement between member states and signal that a compromise agreement is there to be had. Whether it will be enough to appease those states looking for deep budget cuts such as the UK, Sweden and the Netherlands remains to be seen.

France’s apparent move away from its pledge to fight for a nominal freeze in the CAP budget has not gone down well with farming groups in the EU, with umbrella organisation Copa-Cogeca demanding a freeze at a 400-strong meeting in Brussels on Wednesday.

A good survey of French interests, and changing perceptions, of the CAP can be found here: France