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Australian report raises queries on CAP reform

The Australian Bureau of Agricultural and Resource Economics (ABARE) has long been a consistent critic of the CAP. In its latest report The European Union’s Agricultural Policy: A Stocktake of Reforms it acknowledges the EU’s reform efforts to date, but highlights areas where more needs to be done. Its main conclusion is that, while the EU has been changing the form of its agricultural support policies toward ‘decoupled’ payments, very little has been done to reduce the level of support. In particular, substantial support and protection have been retained through tariffs and tariff quotas, and member states have retained some ‘coupled’ payments.

Two issues in the report are worth further comment. The report agrees that changing from highly distorting price support to decoupled payments reduces market distortions because prices faced by consumers are closer to world prices, but it is less convinced than decoupled payments reduce production distortions as much as eliminating support.

Leaving aside the fact that member states have been permitted to retain some support in a coupled form, the report argues that the income and wealth effects of the payments affect credit availability and the adoption of new technology; that producers may believe that their future entitlements may be influenced by current production decisions and thus that current production is affected by the payments; that the payments allow farmers to continue with their traditional production without the risks of making changes and thus lock in production patterns which reflect past high levels of support; and that because the payments support land prices they help to keep more land in agricultural production than would otherwise be the case.

These arguments echo those made by some developing countries in the current WTO Doha Round negotiations which have called for a ceiling also on overall ‘green box’ support, including decoupled payments. Such an argument is a distraction in the Doha Round of negotiations, where far more trade-distorting subsidies and market access barriers remain to be tackled. We also need more evidence on the quantitative strength of these effects, which will only emerge over time. The value of EU decoupled payments will steadily fall in real terms in the period to 2013. Nonetheless, it is clear that green box payments will come under greater scrutiny in the future, and that this will be a factor when it comes to make decisions on the future of the Single Farm Payment after 2013.

A second major warning shot fired by the report concerns EU dairy reform, where it criticises the Agricultural Commissioner Mariann Fischer Boel for suggesting that production quotas might be expanded over the next few years in preparation for the elimination of quotas after 2015.

The report was prepared before the recent surge in world market prices for dairy products, and assumes that EU market prices are well above world prices. It also appears to assume that any future reduction in price support would trigger compensation to dairy farmers (an assumption which I have queried in an earlier post).

The report’s argument assumes that any marked quota expansion at existing levels of support would result in increased production and exports, which would lead in turn to depressed market prices for dairy producers both on world markets and to EU producers and the risk of demands for additional compensation. It recommends instead that quotas simply be eliminated (we must presume in 2015, although the report is silent on this point, as it is on the fact that this would have to be accompanied by a significant reduction in support prices on the report’s own assumptions). Its major point seems to be that to expand quotas before support prices have been reduced would result in added production capacity which would be hard to get rid of after 2015.

This is a valid point which should be integrated into the dairy reform proposals in the Health Check. However, it would be inappropriate to delay both quota reform and reform of dairy price supports until 2015. What are required are a simultaneous and steady increase in quotas as well as a reduction in dairy support prices over the period 2009 through 2014 to give credibility to the policy decision to eliminate quotas from 2015 and to smooth the path of adjustment. The current period of buoyant world market prices provides a further compelling reason to start the reforms now.

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