€500 million farm aid package announced

The farm aid package announced by the Commission (in the form of Vice-President Jyrki Katainen in the absence of Commissioner Hogan due to illness) at the extraordinary Agriculture Council yesterday exceeded the expectations raised by the Presidency background paper in a number of respects (the elements of which related to dairying I discussed in this post), but fell short of what some Ministers had sought and what the farm organisations deemed satisfactory. The Council’s conclusions can be accessed here.

In my view, the package is a measured response to the difficulties in some specific farm sectors and, indeed, the Commissioner has held his nerve in the face of demonstrations and protests. However, further discussions will continue at the end of this week and at the informal Agricultural Council next week (14-15 September) which otherwise will focus on agriculture and climate. These are intended to address some of the practical implementation questions raised by the Commission’s proposals but the issue of raising the intervention price for dairy products may still not be finally settled.

My previous review of the dairy elements in the Presidency’s proposals broadly stands, although the size of the package (€500 million) is greater than the number (€350m) that had been circulating prior to the meeting. I had also not specifically addressed the direct aid package targeted at dairy farmers. It further appears that the Commissioner had done his homework at the Commission meeting the previous week and had been given approval to fund the measures out of higher receipts from the superlevy fines rather than the crisis management fund.

The €500 million package

The measures included in the assistance package are listed in this Commission factsheet. The key ones are:

• Provision of direct targeted aid to the dairy sector significantly greater than the amount (€300m, even if Vice-President Katainen mentioned a figure of €330m in his press conference yesterday) that was provided during the 2009 milk crisis – a sum of around €420m has been mentioned;
• Member states to be able to advance up to 70% of direct payments and up to 85% of area- and animal-based rural development payments from mid-October (up from 50% and 75%, respectively, currently allowed;
• Tapping into the new European Fund for Strategic Investments to attract more capital into the industry. An idea specifically mentioned is to design a financial instrument where repayment schedules are linked to commodity price developments;
• A new private storage scheme for milk products, with higher payments and longer storage periods;
• Reopening of private storage for pigmeat;
• Additional funding for promotion of dairy products and pigmeat in the EU and third countries;
• Further intensification of efforts to tackle non tariff barriers in third countries;
• Strengthening of the Milk Market Observatory and the development of a similar tool for pigmeat;
• Establishment of a High Level Group to improve the functioning of the supply chain with possible improvements for farmers;
• Better use of the “milk package” and the preparation for 2016 of the report on the functioning of the milk package initially scheduled for 2018;
• Agreement to push for an early conclusion on the Commission’s proposal to merge the school schemes for fruit and vegetable and milk.
• Recognition of the possibility to mobilise national funding under the ‘de minimis’ rules as well as to provide state aids in addition to funding under rural development programmes.

Comparison of 2015 response with 2009 milk crisis

There is a striking similarity between this package of measures and that introduced in 2009. The June 2009 Agriculture Council asked the Commission to come forward with possible options for stabilising the dairy market, while respecting the outcome of the Health Check. After a price spike in 2007, prices for milk delivered to the dairy had dropped from 30-40c/l to an EU-27 weighted average of 24c/l with prices for many producers at 20-21c/l or less. However, already by October 2009 prices had begun to improve (see chart here). I compare the two packages in the table below (see this earlier post for an evaluation of the 2009 dairy package).

Key similarities can be underlined. In both cases the emphasis has been on providing income support to dairy farmers through a dairy fund and advancing direct payments rather than regulating prices (update 16 Sept 2015, although recourse to export subsidies in 2009 which amounted to more than half the cost of the aid package would have helped to strengthen market prices). For market intervention, in both cases private storage aids were preferred to public intervention, and emphasis was put on promotional measures. In neither case were intervention prices increased. National aids were seen as a legitimate instrument in both cases. Also in both cases a High Level Group has been established to look at longer-term structural issues. One important difference is that there has been no recourse to export subsidies on this occasion.

The overall cost of the measures taken to respond to the 2009 crisis was provided in a Commission reply to a question from the Green MEP Martin Häusling in July 2013. EU expenditure for dairy from 2009 to 2013 amounted to €373m for export refunds, €36m for private storage and €294m for the specific market support measure (i.e. the dairy fund). Interestingly, public intervention actually resulted in a net income of €50 million.

Direct aids

The facility to advance part of the direct payments and rural development payments was widely welcomed, though most ministers emphasised that flexibility in the controls was needed to help facilitate implementation.

The new dairy fund is the single largest element of the package agreed yesterday by the Council. Questions remain to be answered about the allocation between member states. Some observers such as COPA-COGECA point out that the money involved, if divided across all dairy farmers, would not amount to much per individual farm. France alone in July announced national aid to its livestock farmers estimated at €600m, most of which was intended for loan guarantees and restructuring. But there were clear budget constraints on what the Commission could propose. But it is clear that the Commission expects further national aid packages later this autumn.

Raising intervention prices

In his speech to the Council, Vice-President Katainen (on behalf of Commissioner Hogan) went out of his way to argue against an increase in dairy intervention prices:

I would also want to say something about the idea that the price for public intervention should be increased. We owe it to farmers to make it clear that this is not the appropriate policy response to the current situation.

In terms of the clear market orientation of the CAP, the Commission does not believe that increasing the price for public intervention is consistent with that approach. And market orientation is a necessary foundation of our policy, to secure the future of European farmers. Moreover, we don’t believe that it would solve the current market problem.

At a time when there is a clear market imbalance, increasing the price paid for public intervention will do nothing to restore market balance but would instead create an artificial outlet for EU dairy products. It would weigh on the EU competitiveness for the 10% (or more) of EU milk production that need to be exported. I am also concerned that the very existence of EU public stocks would simply push market prices down further, thus deepening and prolonging the current difficult situation. It would also remove the incentive for a cautious approach on the supply side in times of market turbulences.

I believe it is important to be clear about this.

It appears a minority of around ten member states were in favour of an increase in intervention prices and may try to re-open this issue at the informal Agriculture Council next week.

Implications for the market crisis reserve

The one prediction in my preview of yesterday’s Agriculture Council which was not fulfilled was on how the new measures would be financed. I was sceptical that the €440m already entered into the CAP budget as ‘assigned revenue’ arising from superlevy fines would be reallocated to finance a new dairy fund. However, the actual receipt of superlevy fines will be higher than what the Commission had entered into its draft 2016 budget. When the amending letter to the budget is published next month, it is this additional superlevy fine income (plus some other unused appropriations) that will be used to fund the additional measures, and the crisis reserve (which is ultimately funded out of farmers’ own direct payments) will not be used.

The crisis reserve did not exist in 2009, but it is interesting to note that the 2009 dairy fund was financed outside the EAGF budget under Chapter 40 02 Reserves for financial intervention, which is used where there is no basic act in place allowing for these payments. To permit the creation of this fund the Article 186 market disturbance clause in the previous CMO Regulation had to be extended to milk in 2009. The regulation establishing the specific market support in the dairy sector (i.e. the national envelopes under the dairy fund), following the extension of Article 186, noted cryptically that “The measures provided for in Article 1 [the national envelopes of direct support] of this Regulation shall be deemed to be intervention measures intended to regulate agricultural markets..”. It seems that a certain amount of ‘budget innovation’ was also necessary in 2009 to permit the dairy fund to be established.

However, the interesting question raised by the Commission’s approach is exactly when the crisis reserve might be used. One (extreme) interpretation might be that there should only be recourse to the crisis reserve if there is an insufficient margin under the EAGF ceiling. But this is unlikely, as it implies an expectation that finance ministers will always agree to appropriate additional funds up to the EAGF ceiling. The Commission is assuming that finance ministers next month will approve to fund the additional expenditure necessary to pay for yesterday’s package out of the higher-than-expected budget receipts from the superlevy fines. But this is not necessarily a foregone conclusion; the ECOFIN Council could well insist that at least some of the cost should be borne by the crisis reserve.

Industry needs to put its own house in order

I concluded my previous post by pointing out the danger that dairy industry participants, if they expect that the taxpayer will come to their assistance every time there is a cyclical drop in prices, have no incentive to act to put their own house in order. There is interesting confirmation of this link in the Commission’s Fact Sheet on the measures introduced yesterday where the Commission noted that “the Milk Package provides a range of measures aimed at giving producers a stronger position in the dairy supply chain, such as written contracts, collective bargaining, encouraging Producer Organisations, but the take-up has been slow in some regions because market conditions have been relatively favourable since 2012.” In other words, why bother to prepare for a rainy day when we know that we can always tap into the EU budget when times get tough?

Another example is the lack of interest in the income stabilisation tool in the recently-submitted Rural Development Programmes, where only a few member states have programmed this tool.

Finally, we are to have a High-Level Group to look at the need for futures markets and other risk management instruments seven years after it was blindingly clear that quotas would be eliminated in 2015 and that price volatility would have to be managed.

Against this background, the Commission’s proposals yesterday are an appropriate response to the real difficulties faced by producers at the present time.

This post was written by Alan Matthews

Photo credit: Daniel Florindo via Twitter

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