A paradigm shift in CAP?

Gwilym Jones of the European Commission set out a vigorous defence of the CAP reforms at the Westminster Food and Nutrition Forum in London last week. He claimed that they represented a paradigm shift which would re-link farmers and citizens. It put farmers in greater control of their day-to-day economic choices.

Jones claimed that the greening measures were a game changer. They offered measures which protected soil, water and biodiversity (interestingly there was no reference to climate change.

One positive feature that Jones did draw attention to was that all payments to farms would be published, stating 'we have nothing to hide.' It remains to be seen what this move towards transparency means in practice and how accessible and reliable the data turns out to be.

Jones insisted that farming is different, asking what other industry faced exceptional weather events.

Chris Horseman of Agra Europe asked why decoupling had been put into reverse. Jones disagreed that this was the case, arguing that some sectors worked with very severe conditions, for example mountain areas. But this has always been the case and does not justify an extension of coupling.

CAP reform a dress rehearsal?

The CAP reform could simply be a dress rehearsal for a further reform, suggested David Baldock of the Institute for European Environmental Policy at a seminar of the Westminster Food and Nutrition Forum in London last week. The reform could serve as a means of showing which issues we had to get serious about. The reform had been a rush, it didn't have a finished feel about it. This was a widespread perception in Europe. What was needed was a credible mid-term review.

What was good about the reform was that the public goods idea survived in the CAP. It also couldn't be a one size fits all policy. On the downside, there had been a loss of the commitment to transparency and simplicity. There was a theoretical possibility of reverse modulation.

On the greening measures, it was quite difficult to see what was going to change on permanent pastures. The Ecological Focus Areas had changed greatly from original proposal. The idea covered much less than had been originally envisaged. Cross-compliance entailed a softening of the regime in some directions. Protecting carbon rich soils, the most innovative idea, had been lost.

The last Mid-Term Review was in the Fischler reforms and, as Baldock noted, the then Commissioner had created a platform and had worked to create relationships with heads of government and ministers. My question would be whether anyone around today possesses Fischler's adroit skills.

Challenges remain for Lithuanian presidency

EU agriculture ministers will meet in Brussels for the first time under the Lithuanian Presidency on Monday (July 15) and for the first time since an agreement on most aspects of CAP reform for 2014-2020 was reached by the EU institutions, reports Agra Europe. Vilnius began work on July 1, after being passed the torch by Dublin, who garnered wide praise after largely concluding the CAP reform package. But the Lithuanian Presidency, in it’s maiden term in the position, will have to oversee certain parts of the reform that were still up for debate when the deal was reached last month.

As part of their mandate, the new presidency will need to seek progress on the remaining issues left out of the reform agreement, which include the ‘degressivity’ proposal, co-financing and rural development. They will need to seek a compromise with Parliament, which is irked by the Council’s resistance to negotiate on the positions taken by heads of government on the 2014-2020 ‘multiannual financial framework’ (MFF). MEPs maintain that it is their legal right to have an equal say under the Lisbon Treaty.

Lithuania continues to affirm that member states will not be willing to re-open negotiations on CAP reform with respect to the recently approved budget. Monday’s meeting of EU agriculture leaders should shed some light on what, if anything, the Council is willing to do to appease MEPs, Agra Europe predicts.

What is the CAP for?

I give my views here: What is the CAP for? The editor has put in some helpful links.

Why no capping?

George Monibot complains in The Guardian about the absence of capping or degressivity in the CAP reform deal: Monibot

The reason Britain and Germany opposed these proposals is that they have a lot of large farmers and agreeing to capping would disadvantage them and cut national receipts from the CAP. The more fundamental issue is whether the CAP is there to support the global competitiveness of EU agriculture or is meant to be a social policy for marginal farmers.

EU backs away from commodity speculation controls

It look as if the EU is going to back away from imposing limits on commodity speculation. Of course, not all commodities are agricultural, but according to consultancy ETFGI there are 111 agriculture-focused products with €2.8bn of assets. Within exchange traded funds about 30 per cent or $55.5bn of these assets include agricultural investments, according to data from Somo, the centre for research on multinational corporations.

Critics argue that current trading practices help to boost food price volatility. There is no proof that this is the case, but many believe that excessive trading in derivatives can accelerate bubbles and create heavy price peaks which disadvantage the individual consumer. The US has already adopted position limits for a number of core commodity futures and option contracts, including corn (maize) and wheat.

NGOs had been hoping that position limits would be imposed on commodities speculation under the EU's revised Markets in Financial Instruments Directive (Mifid II). Such limits would restrict the activities of fund management companies that continue to engage in soft commodity trading, a number having pulled out earlier in the year. Reputational damage was a major motive for quitting speculative trading.

However, the European Council wants to allow individual member states to set their own position limits. Christine Haigh of the World Development Movement argues that this would pit member states against each other in a race to the bottom. The UK and France are thought to be the most likely to put lenient position limits in place to allow current trading practice to continue as normal.

The Commission and Parliament continue to favour Europe-wide rules, so it remains to be seen what emerges from the trilogue process with a final decision expected by March 2014.

CAP reform deal struck

A deal has been struck in the trilogue process on CAP reform: Done deal. It has been made possible by passing some of the thorniest issues on to heads of government. There has also been a considerable watering down of the original greening proposals which were supposed to be the motif of this particular reform. The National Trust criticised the deal as a backward step: National Trust

NFU president Peter Kendall argued that the deal granted individual countries too much flexibility. It would result in a CAP that was less common, less market-oriented and more complicated. Of course, one of his concerns is that within England the Government will go for more market oriented policies while subsidies are enhanced elsewhere, leading to the absence of a level playing field.

One colleague said that she would now have to change her lecture on the CAP. She won't have to change that much.

Progress made on CAP reform deal

As is so often the case, these things go down to the wire, but it looks as if real progress is being made at last on a CAP reform deal. European Union farm ministers reached a revised negotiating position as the clock struck midnight on Tuesday, raising hopes that a new common agricultural policy will be agreed on Wednesday as talks moved to Brussels, reports Reuters.

'We now have a clear updated mandate ... There's lots of momentum here,' said Irish farm minister and Council chair Simon Coveney following two days of negotiations in Luxembourg.

However, Coveney admitted 'There are some difficult issues to resolve. I am not predicting it is going to be easy. It is not.' Issues that still need to be resolved include the deadline for abolishing EU sugar production quotas, which are blamed for pushing up domestic prices and limiting European sugar exports.

A key sticking point in talks could also be who makes the key decisions on issues such as market intervention, with the European Parliament wanting an increased role, something which ministers have been reluctant to accept. Coveney said no member state voted against the revised mandate, but Britain and Germany abstained on the European Parliament issue. Co-decision has already made it more difficult to achieve agreement.

Parallels between Thai rice policy and the CAP

This interesting article by a former PhD student of mine looks at rice policy in Thailand and sees certain parallels with the CAP: Thai rice policy

CAP reform process hits new snags

Despite the relatively optimistic mood at the recent 'informal' Farm Council in Dublin, the CAP reform process has hit new snags which suggest that a deal may not be reached under the Irish presidency.It appears that a resolution to the EU’s CAP reform process could be delayed further beyond the end-of-June target date, after the European Parliament threatened to veto any deal over member states’ refusal to budge on certain issues, reports Agra Europe.

Parliament agriculture committee chair Paolo De Castro this week slammed the European Council for its approach to the recent ‘trilogue’ discussions on the issue, claiming their approach goes against the "spirit" of the Lisbon Treaty, which granted MEPs equal say on farm policy under the ‘Ordinary Legislative Procedure’. MEPs want to reach a deal by the end of June – when the Irish Presidency ends and the Lithuanian Presidency begins – but this will not happen unless all subjects are up for negotiation and the Parliament's views are heard, De Castro stressed in an impassioned speech this week.

De Castro is just the latest agriculture official to express his public frustration at the drawn out negotiations on CAP reform and perhaps calls into question the suitability of the co-decision procedure in reaching an agreement on this policy, something which has concerned me for some time.

Enhanced co-decision making has been defended as injecting greater legitimacy into the EU institutions, as directly elected MEPs should in theory increase the democratic input of European citizens, and thereby lead to improved legislation. But then according to one recent poll, over 50 per cent of British voters do not know they elect members of the European Parliament. In any case the process appears to have been the victim of growing euroscepticism across the bloc, as well as the austerity agendas of certain member states.

The CAP reform process appears to have hit a brick wall and unless there is a dramatic breakthrough at the ‘trilogue’ talks in the next couple of weeks, the Luxembourg Farm Council on June 24/25 – when it was hoped a CAP reform agreement would finally be signed, sealed and delivered – could turn into a damp squib. Some member states have said they may not even bother to turn up.

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.