As to the lack of urgency, the analysis states that the Commission does not seem to realise that the European Union is in its biggest crisis ever and therefore does not provide any plans for acute natural/food security crisis. This argument is underpinned by that fact that there is neither prioritisation of objectives nor hierarchy of goals in the proposals. As to the lack of systems approach, it is well identified by GDB that income support in the current policy setting will not improve competitiveness of farmers as other factors like markets, services, information, capital and infrastructure as well as the position of farmers in the food supply chain seem to play a much more important role in this regard. The analysis also reveals that an integrated perspective is missing from the proposals regarding the common treatment of competitiveness and sustainability. GDB states that proposals

“reducing greening to existing cross-compliance measures and a very limited number of additional ‘greening’ components without clear ideas, objectives and incentives for farmers to continuously improve performance”.

On the whole, it is concluded that current EC proposals seem to maintain the existing status quo in times when a more radical reform would be needed.

Based on these criticisms, the GDB put several recommendations on table to improve the CAP proposals. The biggest novelty of the analysis is the development of the “greening menu approach”, offering flexibility and better targeting as well as incentives to farmers to improve their performance in sustainable food production and delivery of public goods. The idea would work on the basis of a system in operation in the U.K. since 2005, splitting greening payments up into several domains (water management, soil management, energy management, biodiversity management, etc.). For each domain farmers can achieve a maximum of 100 points by taking into consideration that a certain minimum level for each domain should also be reached. This baseline can gradually be set higher, giving farmers the opportunity to adjust their farming practices to be able to meet the new baselines. Furthermore, farmers can go beyond the baseline requirements for specific domains, thereby receiving a premium payment in line with the increase in performance points.  The systems would also allow premiums to be given to farmers applying measures over a longer period of time and to farmers who work together in territorial collectives. This might also be accompanied by research agendas and facilities to support farmers to develop better agro-ecological practices and performance.

Although the implementation of such a system requires further details, the idea is definitely worth considering.

This post was written by Attila Jambor.

Greening of direct payments is the focal point of the Commission’s legislative proposal. By this measure, Commissioner Dacian Ciolos substantiates the reform orientation and greater target orientation of the proposed new Common Agricultural Policy. Out of all funds for direct payments, 30 % would be allocated to fulfilling the environmental conditions, which is EUR 12.5 billion annually and five times more than the amount of funds for the agri-environmental measures under the current rural development policy.  The impact of agriculture on the environment is undisputable; we economists understand it through the concept of externalities or public goods, as something that cannot be regulated societally correctly by market forces.

Two poles: environment as target or excuse?

In last two decades, the arguments for the reform of traditional agricultural policy through targeted support for eco-system services of agriculture have been strengthening. The latter is also a part of the pro-reform campaign by the environmental organisations, which also emphasise that these services need to be carried out in a controlled manner. On the other hand, the representatives of European and national farm organisations and most Member State governments do not give an impression that they are actually standing for such an argumentation of the reform. For most of them the environment is just an unnecessary obstacle; they accept with clenched teeth the proposed direction of reform, “understanding” that there is a need for a new justification of the preservation of extensive support for farming. Moreover, there are the barely living WTO negotiations which call for the reform; if they are by any chance brought to an end, the European agricultural policy would also need some argument to be ranked among the less distortive type of measures, which makes the reform urgent.

In this game between the two poles, again the political-economic reality is the winner. Commissioner Dacian Ciolos apparently played on both cards, but it will be interesting to analyse which side he wanted to please more with the very concept of the policy. It needs to be explored whether the substance of the proposed measures even allows for a more targeted and environmentally tailored orientation of the policy, or is it more about the fight for preservation of the money for agriculture or, as some critics say, the reform is more about the “green washing” of the reform. As a rule in public policies, the devil is in the detail, which is why we shall analyse some key issues of the greening components of the direct payments as the key concept of the future CAP reform.

The amount of funds for greening was set at 30 % of all direct payments. How was this percentage determined? Was it a result of an estimation of the necessary amount of eco-services? Definitely not, as no such study was mentioned by the proposers. The impact assessment, which is, by the way, technically questionable and could not easily survive any methodological examination by a doctoral seminar of agricultural economics at renowned universities, speaks of the loss of income caused by the greening measures, but it includes no calculation leading to this concrete percentage. Even if they decided to set this level arbitrarily, because it is not possible to set it in any other way and it is most easily justified politically, the fact is that the need for greening of the policy and the understanding of such argumentation differs significantly across Member States. European agriculture is very heterogeneous and the environmental burden of agriculture is the heaviest in the countries and regions alongside the North Sea, where intensive and largely monoculture production prevails. In these areas, this is also a societally and publicly very relevant issue. But there are also areas in the EU where agriculture does not present an environmental problem or is at least not seen as such by the public. It is almost perverse to talk about target-oriented eco-services for instance in some areas in the eastern part of the Community (e.g. eastern areas of Bulgaria, Romania and parts in the Baltic States), where rural poverty is a real problem, where vast areas are not cultivated and thus remain in half natural condition. And they are supposed to pay for eco-services!

Apparently, the reform proposers see and judge the situation in agriculture and public awareness of it predominantly from the point of view of a very narrow part of north-western Europe. The damage caused by such arbitrary solutions, however, will be done elsewhere. The greening funds could only be a sum of target measures taken in the actual areas and with due consideration of the actual preparedness for payments. All the rest are just political excuses for the policy or for the greening.

Environmental or only political benefits?

In substance, there are three “greening” conditions which agricultural holdings will have to meet. The first condition is crop diversification on arable land. Holdings must record the minimum shares of at least three crops. This is meant to prevent the cultivation of environmentally non-sustainable monocultures, reduce soil erosion, loss of organic substance in soil and pollution of underground waters. This is definitely not a bad proposal to improve the environmental dimension of the agricultural activities. It will limit the decisions of farmers and force them to introduce better agricultural practices. The question is whether the three crops condition is actually related to any additional costs? Agronomists will ask whether the crop rotation is not the very standard in production, which has been written down in schoolbooks for decades as it leads not only to better environmental but also to long-term economic results? Why would it be necessary to additionally pay for this? Some Member States, also some new ones, e.g. Slovenia, have fulfilled this condition even to a stricter degree in the current cross-compliance requirements. For these countries, the introduction of crop differentiation instead of crop rotation would mean a step back and therefore no serious progress in eco-services. They will need to preserve these measures, this is true, but we cannot help feeling that this condition was merely set to justify the preservation of the existing level of funds for agriculture without any known or measurable additional environmental benefits, at least not for an important part of the EU regions.

The second condition is that agricultural holdings need to maintain practically the same percentage of permanent grassland as in the reference year (2014) also in the future. Grassland is important for preservation of habitats, it accumulates greenhouse gas emissions and thus contributes to the mitigating of climate change impacts. Permanent grassland is the land where no other agricultural use is possible or where green cover has been in place for several years. At least for a significant share of the “real permanent grassland” where no other agricultural use is possible, it is somehow useless to speak of maintaining the structure of use. Extensive grassland in the alpine, mountainous and karst regions are a part of cultural landscape and have at least some public value. To be able to keep them, it is important that their use is economically viable. And in many of these areas this could be achieved by the combination of current payments with some reasonable, possibly extensive breeding of animals and production of high quality traditional food. So, here the greening is not the first argument for the support and if the proposers think to preserve the landscapes they have to consider a broader concept of support rather than preserving the share of permanent grassland; it is too simplistic.

 Also the impact of the conditionality to preserve the grassland on habitats is questionable, as it does not distinguish between different types of grassland; it should largely contribute to preserving those types of grassland which have an actual environmental value and not to the intensive production on the grassland which, for example, prevails in the flat regions around the North Sea.

 Much more bizarre is perhaps a recognisable hidden intention to keep the vast uncultivated grasslands in new Member States outside the intensive agricultural production. It is a discriminatory and unfair intervention for these countries and should not be part of public financing scheme. The fact is that this part of Europe is already in a less favourable position in terms of the level of payments, as it was determined during the accession negotiations based on lower intensity of production at that time; therefore any additional conditionality that would hamper development and production of food in this part of Europe is very unfair and politically destructive.

 In short, the preserving of grassland share not only lacks a clearly defined target, which could lead to additional problems, but also its environmental effects and economic justification are questionable.

 Magic 7 %

However, even if we could live with the first two conditions seeing them as the necessary political economic reality despite their limited environmental impact and poor economic justification, the introduction of “ecological focus area” could be a real nightmare. Farmers, bureaucrats, politicians and environmentalists, they have all been banging their heads about how to actually implement the measure of setting aside 7 % of farming land, excluding permanent grassland. Here the proposal speaks of some landscape or environmental elements in the use of land. We can imagine field margins, terraces, groups of trees as well as buffer strips contributing to a better landscape and habitat diversity. But reading the current proposal, these elements would need to be introduced on the arable land on all holdings. This is an example of spatial deindustrialization of agriculture.  And there is no need to guess that 7% is only a political magic number. Very brave, but will it work out?

 The EU regions differ significantly in terms of spatial use. We can agree that it is sensible to introduce new landscape elements in the monotonous pools of land along the North Sea and some other areas. It is, however, very contradictory to introduce such measures in a large part of southern and also central and eastern Europe. In these areas, which are marked by fragmented land ownership structure in agriculture and naturally diverse terrain, a large share of forest and grassland (e.g. Alpine and Scandinavian countries as well as a large part of the Mediterranean), the diversity condition applies intrinsically. In these areas, it is more about the quality of these elements and their disappearance because of abolishing agricultural production.

 In a country such as, for instance, Slovenia, landscape elements have been excluded from the areas eligible for direct payments for the last several years, with a view to preventing any incorrect subsidizing. This resulted in additional administrative work and quite some dissatisfaction as well as concrete damage for individual farmers. In Slovenia, it is unconceivable to create some new Potemkin villages of landscape elements in the present structure of agriculture, as the average size of agricultural land is 6 ha, the prevailing area is permanent grassland, and the forested area is expanding and currently accounts for more than 60 % of total area. From the environmental point of view, it would perhaps be sensible to implement this measure in a small (representing only a few per cent of total area) area in the north-eastern flat parts of the country. When mentioning this issue to some EC representatives we were told that that this should not be a problem for Slovenia, that only the areas which have so far not been included into areas eligible for subsidies system (and were excluded for the last decade) should now be added. This is a simple bureaucratic answer, which, however, entails huge administrative costs, a bulk of administration and additional stress for each individual farmer, in many cases a less-educated elderly head of agricultural holding. And all this just to justify subsidies but completely disregarding real environmental effects, huge public costs and dissatisfaction among farmers? Could such areas, i.e. the areas under NATURE 2000, mountainous areas or areas with prevailing grassland or forest not simply be excluded from such requirements? It is rather worrying that the Commission has not foreseen this problem and that it should be addressed only now, in the political negotiations, when the majority coalition needs to be formed to effect any change, which is extremely difficult without the Commission or large countries on your side.

 Please, propose something more consistent

Last but not least, there is a question of how this environmental orientation through a greening component of direct payments will be paid at all. As these are in fact additional conditions, they could become a part of the existing cross-compliance conditions for granting direct payments. They would only need to be adapted to the situation in a certain region, whilst some general conditions would also apply. That would be relatively easy compared with the above mentioned system. But, obviously, such a proposal would not be politically “sellable” neither for the public nor for the WTO and was therefore opposed to also by the Commission; which reduced any chances if its realization. As this special greening package will apparently be implemented, the farmers around Europe have already started to speculate how to avoid these expensive solutions and come to terms with lower (70%) payments. This is not compatible with the logic behind the proposal, which defines the greening component as a general condition rather than a supplement. In negotiations and implementing acts, we can therefore expect pragmatic solutions that will eventually result in an even less green greening policy.

All in all, the greening proposal seems to be mostly a political and rather symbolic act, a political bone to chew on, which could eventually, when it comes to practical implementation, stick into somebody’s throat. The proposal has not been very carefully thought out and has more elements of “washing” than of seeking target-oriented tailor-made solutions for a policy. Can the EU really afford to accept it as a political economic reality and the most that could be achieved at a given moment? In these times of political and economic crisis, Europe should not afford it. Greening of CAP is a shame for the EU. Such decisions only further deepen the distrust of public policies and increase uneconomical spending of public money. The proposal is so inconsistent that political negotiations could in no way improve it, only further spoil it. It should be admitted that the “emperor is naked” (or better that “he is not green enough”) and the proposal should be returned to the Commission to prepare a better and a less political solution. The fact that the Commission “negotiates” in advance with stakeholders from large Member States and non-governmental organisations of both poles even before tabling the proposal makes Europe even less efficient and more confused. Greening of the CAP is a good example of such practice, regardless of it being a question of “sly intentions” of its creators to serve all interests or merely a question of incompetency (or God forbid imbecility) of the whole proposing procedure.

 This post was written by Emil Erjavec   

Any application of the leaked values would severely hamper the ability of biodiesel manufacturers to enter into the EU’s new biofuels certification plan, announced last August.

Assuming that the EU does not relax its overall target for renewable energy in transport fuel (10% by 2020), if biodiesel fails to make the grade this would raise the demand for bioethanol made either from domestically-produced sugar beet or imported either from Brazil or Southern Africa.

This post was written by Alan Matthews.

The Presidency structured the debate around two themes: the effectiveness of exceptional measures in case of market disturbances and crisis; and the proposed measures aiming at a more competitive and well-functioning food supply chain. The debate, which lasted just over two hours, can be followed here on video.

The key battle lines that emerged can be summarised as follows. For simplicity, I refer to those who would like to return to a more managed market as the ‘blues’, and those who would like to push further in a more market-oriented direction as the ‘reds’, while recognising that this crude distinction does not always work. For another summary of Monday’s debate, see this Europolitics article.

Market disturbances (Articles 154-156)

There was general agreement that agriculture is vulnerable to various types of crisis and market disruption, including from animal disease outbreaks, extreme weather events, and loss of consumer confidence due to a food safety breakdown. The Commissioner also highlighted that sectors could face a crisis not only because of low product prices but also where margins are squeezed by high input costs.

The regulation provides for measures to deal with both kinds of crisis and the general market disruption clause is expanded to cover all sectors in the current CMO. The Commissioner has emphasised the need for a speedy response to crisis situations, and supplementary funding to deal with crises is proposed in a crisis reserve outside of the main EU budget.

The ‘blues’ did not have much to complain about in this proposal. Some countries were unhappy with the extent of the dismantling of market instruments in the past – Spain and Poland called for a broadening of intervention and an increase in reference and trigger prices but there seemed little appetite for that. Latvia wanted the risk management toolkit proposed for Pillar 2 to be moved into Pillar 1.

The ‘reds’ raised a range of issues. Some countries were concerned about the need for a clearer definition of market disturbance and for a clear distinction between crises and normal volatility to avoid this measure becoming a form of income support. These countries expressed unease about giving the Commission quite far-reaching powers through delegated acts to introduce safeguard measures. They wanted more guidance on when these measures could be invoked written into the basic law, and more involvement by the member states in making the decision.

Countries differed on whether the crisis reserve should be outside the budget or not. Poland was not happy with the level of co-financing of the animal health and consumer confidence measures and wanted a higher rate of co-financing than the 50% proposed.

Market management

The milk quota system and the vine planting ban are set to expire under existing legislation. Sugar quotas are also set to expire under the existing regulation by 30 September 2015.

Wine-producing countries are unhappy with the disappearance of the vine planting ban and have come together to reverse this decision. Commissioner Ciolos at the Berlin Green Week earlier this month announced the establishment of a high level group to discuss wine reform to report by the end of this year, with no subject taboo. This proposal was not surprisingly welcomed.

‘Blue’ countries also sought to delay the end of sugar quotas, with a number of countries calling for an extension of quotas to 2020. An extension was justified on the grounds that the sector had just come through the 2006 reform, and that a number of processors had invested heavily in acquiring additional quota. One country argued that quotas were necessary to secure adequate sugar supply in the EU.

The fact that the end of quotas in 2015 was clearly signalled as part of this reform and processors should have been aware of this when making their investment decisions seems overlooked in this argument. It was left to the Irish Minister to point out that, in a situation of high sugar prices and short supplies on the EU market, the quicker that quotas were removed, the better.

Improving the functioning of the food supply chain

The ‘blue’ countries are generally happy with the proposal for compulsory recognition of producer organisations and inter-branch organisations, and with the proposal to extend the derogations from competition policy rules which currently apply in the fruit and vegetable sector to all products (while still excluding activities which would fix prices or restrict market access).

The ‘red’ countries objected to the mandatory recognition of producer groups, arguing it should be left up to member states. Other countries were concerned that the proposal to extend PO rules to all producers could lead to the creation of a dominant position in the market place, or the potential for abuse of dominant position. Sweden took the most radical position that strengthening producers’ competitiveness was fundamentally about innovation and not about market regulation.

Phasing out export subsidies

The Commission has not proposed any change to the existing situation with respect to export subsidies. But one of the encouraging aspects of the debate was the number of member states who took the opportunity to explicitly make clear their opposition to the continued use of export subsidies after 2013. There is an opportunity here which can be built on.

This post was written by Alan Matthews

The demand from the new member states for greater convergence in the value of the direct payment per entitlement (or eligible hectare) in the current CAP negotiations means that redistribution is now firmly on the reform agenda. But it also makes reaching agreement much more difficult.

This is illustrated in a paper by Kyosti Arovuori from the Finnish Pellervo Economic Research PTT institute and and Jyrki Niemi from MTT Agrifood Research Finland at the Annual IFAMA World Symposium in Frankfurt last June. They examine a set of potential redistribution criteria identified in the Commission’s November 2010 Communication for their ‘political feasibility’, and conclude that none would pass the voting procedures of the European Council.

Conclusions of the Finnish research

The basic assumption of the Finnish paper is that countries vote according to whether they are winners or losers in terms of their ‘national envelopes’ under Pillar 1 of the CAP. Given that payments into the EU budget are determined by an objective formula, this is equivalent to saying that member states’ voting behaviour is determined by how the proposal affects their ‘net balances’ with respect to the EU CAP budget.

Although a simplistic assumption, it is a plausible one and has a good amount of empirical support. The eurozone economic crisis and problems with fiscal deficits generally in the EU have diminished the likelihood of ‘altruistic’ behaviour such as arguably influenced the German position in budget negotiations in the past.

The researchers note that the policy options they examine would increase significantly the negative net balances in all three countries with the highest national contributions already under the current CAP (DE, FR, IT) while increasing further the net receipts of those countries which are already big net recipients from the EU budget (RO, PO, HU).

Whether these net recipients could further improve their relative position depends on whether they can put together sufficient votes to win a qualified majority in the Council of Ministers.

What the Finnish researchers do is to count the votes of countries which are winners and of those that are losers under each redistribution scenario and compare the outcome with the minimum number of votes required to pass a proposal (255 votes out of 345 under the current weighted majority voting rule plus a majority of (at least 14) countries. In principle, a member state can also ask to check that a qualified majority represents states with at least 62% of the population, but this possibility has never been used given that a qualified majority requires 74% of the weighted votes in the Council.

They conclude that any policy with significant redistributive effects across the member states is not likely to gain a qualified majority in the Council.

Caveats

There are a number of possible extensions to this approach. One is that it neglects the possibility that Pillar 1 and Pillar 2 national envelopes might be negotiated simultaneously thus giving an extra degree of freedom in the negotiations (a country losing under Pillar 1 might be ‘compensated’ through the allocation rule selected for Pillar 2, and vice versa). It appears that the MTT group has made similar simulations using both Pillars, but that paper is published in Finnish.

Probably more important, the analysis ignores the impact of the Treaty of Lisbon which has given the European Parliament co-decision power in respect of agricultural policy. While the Council of Ministers has the upper hand in deciding on the overall budgets for Pillar 1 and Pillar 2 (these are set out in the Multiannual Financial Framework which the Parliament can only vote up or down but cannot amend), it has co-equal power in agreeing the direct payments regulation which will set out the national ceilings by member state.

It is still unclear how the Parliament will use its new power, but one might assume that it will be less influenced by the ‘net balances’ issue than the Council of Ministers. While Commissioner Ciolos last week in Dublin insisted that CAP reform could not be agreed until the budget negotiations were concluded, an equally cogent case can be made that the linkage runs in the other direction. It is hard to see member states signing off on a budget deal without knowing how they will be affected by a CAP reform, given the central role that the CAP will continue to play in the determination of overall budget net balances in the coming MFF period.

How does the current Commission proposal fare?

The Finnish paper was written before the publication of the Commission’s proposals for the next MFF and before its legislative proposal for CAP reform was released in October 2011. These proposals suggest a pragmatic redistribution (called the “MFF distribution key”) that provides that member states that currently have direct payments below the level of 90% of the average will close 1/3 of the gap between their current level and the 90% level, to be funded by reducing the payments to member states with above-average payments.

The impact of this proposal is shown graphically in the Figure here.

Figure 1. Redistribution of Pillar 1 using the MFF key

An obvious question is how this proposal would fare in the Council of Ministers, assuming that countries vote in the way that the Finnish researchers assume they will. The relevant tabulation is set out in Table 1. The answer is, at first sight, not very well. With only 162 votes, the proposal would come nowhere near gathering the required qualified majority.

Table 1. Winners and losers under the MFF distribution key

Introducing some flexibility

However, the criterion used by the Finnish researchers is overly strict. If a country is just one euro worse off under the MFF proposal, then it is classed as a loser and assumed to vote against the proposal. (Note that, to control for differences in the overall size of the future Pillar 1 budget, the researchers in fact count as winners those countries whose share of Pillar 1 receipts increases and vice versa).

This criterion seems unduly mechanical. Most countries would be happy to end up with more or less their previous share, even if slightly reduced. Alternatively, we can interpret the additional flexibility as a consequence of co-decision with the European Parliament.

Figure 1 above shows that, in fact, for many countries, the difference between their current receipts and receipts under the MFF proposal is very minor (the Commission diagram compares receipts under the MFF proposal for the overall Pillar 1 envelope with actual receipts under the current Pillar 1 allocation which, in total, is slightly higher, so it even exaggerates the differences in share terms).

Thus Column 4 in Table 1 relaxes the constraint to allow for an arbitrary 5% franchise. That is, a country would be prepared to vote in favour of a Commission proposal provided it did not reduce its share by more than 5% below its existing share. This alters the picture dramatically, and now the Commission proposal has a comfortable qualified majority.

A new parlour game?

The Commission has been criticised, notably by disappointed new member states (most recently in the Joint Declaration by the Ministers for Agriculture and leaders of agricultural organisations in the Baltic States at the Berlin Green Week this January), for the lack of ambition in its convergence proposal. However, it may well have been aware of the arithmetic of the qualified majority voting rule and put forward a proposal which it felt was politically feasible.

Could the Commission have proposed more? Readers could make their own calculations of politically feasible redistributions – a new parlour game for these cold winter evenings.

This post was written by Alan Matthews.

Picture on home page used by permission of the European Parliament under a Creative Commons Licence.

The Commission’s campaign wants to emphasise the CAP as a cornerstone of European integration, as a policy that has provided European citizens with half a century of food security and a living countryside. The year-long communication campaign includes an interactive website, an itinerant exhibition, audio-visual and printed materials, as well as a series of events in Brussels and the Member States.

No one wants to spoil a good party, but of course the overall balance sheet of the CAP remains controversial, to say the least.

CAP benefits and costs

Yes, the CAP helped to stabilise farm prices for EU farmers over the past 50 years and by reducing risk it encouraged farmers to make the investments which contributed to the modernisation of European agriculture over that period. Yes, the CAP resulted in a transfer of income to farmers which helped to smooth the huge rural to urban migration and adjustment that characterised European society in the 1960s and 1970s. And yes, more recently, the CAP has begun to take responsibility for paying farmers for the public goods which are otherwise neglected in production-oriented agriculture.

But these benefits were bought at a very high price. The high protection provided to European agricultural production prevented resources from moving into more productive sectors. It distorted the global trading system to the detriment of developing countries. It led to a costly and inefficient transfer of resources from, often, relatively poor consuming households to much more wealthy farmers.

It pushed up asset prices (especially land) in agriculture and inhibited structural change and the emergence of a more competitive agricultural sector. It contributed little to overall food security in Europe, not only because raising food prices is about the worst way I can think of to try to improve a poor household’s food security, but also because the main impetus to increased production came from the flow of innovations from the chemical, plant breeding and animal genetics industries rather than market regulation per se.

Making the CAP right

It was not that the objectives were wrong, but rather the instruments used to achieve them. This was eventually recognised in the early 1990s with the MacSharry reform, and since then there has been halting progress towards a more efficient and targeted agricultural policy. The extent of this progress, and the distance of the road yet to be travelled, was excellently documented in this OECD report last year.

For those wishing to review the past fifty years of the CAP, there are some excellent monographs, such as Michael Tracy’s Government and Agriculture in Western Europe and Michael Cardwell’s The European Model of Agriculture.

However, for a quick overview of the main trends in CAP support, Tim Josling’s account of agricultural subsidies in Western Europe over the past fifty years is a good starting point. To whet the appetite, I reproduce below one of the graphs in that paper, showing the Nominal Rate of Assistance (NRA) to EU agriculture over the period from 1956 to 2007.

The graph distinguishes between the NRA to exportables (products in which the EU was competitive on world markets, and where the NRA was close to zero for most of the time) and importables (where protection was much, much higher) as well as giving the overall average. It tells the story in a single picture of a highly distorting policy which, over time, has gradually been reformed.

(Josling and Kym Anderson drew on this paper in their own commemoration of the CAP at fifty written five years ago marking the signing of the Treaty of Rome, and it is still worth reading even if they were a little quick off the mark).

European agricultural policy now faces a major challenge in helping to steer the farming industry through the conflicting objectives of producing more food while reducing its resource footprint and protecting environmental assets and biodiversity. As we commemorate the CAP at fifty, we must strive to ensure that, in the next fifty years, the instruments used are better adapted to the objectives to be achieved than was the case in the past.

This post was written by Alan Matthews

Without going very much into detail, it is apparent from the table that agricultural income has been increasing in each and every year in the majority of the cases. Except 2009, the peak of the economic crisis, agricultural real income per worker was higher in all years analysed than in 2005 in most EU-27 countries.

This seems to be good news for farmers but bad news for policy makers if we consider that one of the key arguments for continuous income support of the European Commission is actually the fall of agricultural incomes. In November 2010, the EC clearly stated in its Official Communication that (p.6):

“After a decade of mere income stagnation, agricultural income dropped substantially in 2009 adding to an already fragile situation of an agricultural income significantly lower (by an estimated 40% per working unit) than that in the rest of the economy, and income per inhabitant in rural areas is considerably lower (by about 50%) than in urban areas”.

Although a year later (in 12 October 2011), the EC agreed that agricultural incomes have been increasing, the Impact Assessment says that (p.17):

“Even if the average agricultural income per worker is estimated to have increased by 12% in 2010, this increase followed two years of sharp decline so that the recovery of 2010 has not been sufficient to bring it back to the 2007 level.”

A similar reasoning can be found in the second page of the Explanatory Memorandum of the “reform package”:

“The pressure on agricultural income is expected to continue as farmers are facing more risks, a slowdown in productivity and a margin squeeze due to rising input prices; there is therefore a need to maintain income support and to reinforce instruments to better manage risks and respond to crisis situations”.

So it seems that we have two EC arguments here. The first is that agricultural incomes are decreasing, which is clearly false as discussed above. Nevertheless, the EC seems to neglect this fact and always finds a reason for continued income support.

The second argument here refers to the significantly lower agricultural incomes compared to the rest of the economy. Although EC figures usually support this fact, the devil, as always, lies in detail. For those familiar with agricultural income statistics, it is apparent that conceptual differences exist between the measurement of farmers’ income from agricultural activities and average wages in the economy by member state. It is also clear that the lack of reliable data on full-time equivalent statistics for the total economy results in selecting just a small number of countries to calculate EU15 and EU10 averages, thereby seriously distorting results.

According to a recent research on the topic, average farm household income is greater than the average non-farm household income, contrary to EC data and figures. This also seems to be the case in the U.S. where the median total farm household income exceeded the median U.S. household income in every year from 2000 to 2010, according to recent ERS data. In other words, as concluded by a previous OECD report, there is no evidence that farm households in industrialised OECD countries have systematically lower incomes than other households, so policies to support incomes across the whole sector are unnecessary. If we also take into account OECD-FAO long term provisions for rising agricultural prices and incomes, we might start to really re-think this issue in the long run – an activity I would suggest EC officers to do as well.

This post was written by Attila Jambor.

Three instruments are envisaged in the Commission’s CAP reform proposals to support this agenda:
• Continued support in the Rural Development Pillar 2 for investment in physical assets, business development, cooperation for the development of new products, processes and technologies in the agriculture and food sector as well as a revamping of farmer advisory services to broaden their scope and improve their effectiveness.
• A new European Innovation Partnership instrument for agricultural productivity and sustainability (EIP-A) also in the Rural Development Pillar.
• Increased funding for agricultural and food research under the Commission’s Horizon 2020 research programme.

What do we know about the EIP-A

I last posted about the EIP-A in October last year just before the publication of the Commission’s legislative proposals on CAP reform. I commented then that EIPs were a new initiative under the Commission’s Innovation Union flagship programme and that little was known about how the EIP-A would work in practice.

The EIP-A will not have any funding attached to it, apart from support for the administrative costs of the operational groups and the EIP network. Its intention is to bring together main actors, policies and actions at EU and national levels, from research to market, around common objectives to address major societal challenges more effectively.

Since my earlier post, some limited additional material on the Commission’s thinking behind the EIP-A has come into the public domain, including the Commission’s impact assessment of different options with respect to research and innovation, a presentation at a conference on EIPs organised by the Polish Presidency by Martin Scheele who is the Commission official in charge of the EIP-A programme, and a Commission roadmap produced as part of the impact assessment process for new Commission legislative proposals.

Commission thinking behind EIP-A

In the Commission’s impact assessment, the EIP-A is motivated as follows:

In view of closing the gap between the vast range of innovative research results, on the one side, and the availability of innovative approaches applicable to farming practice, on the other, an European Innovation Partnership Agriculture “Agricultural Productivity and Sustainability” (EIP-A) is set up aiming at an EU agricultural sector that ‘produces more with less’, thereby overcoming the existing development path of enhancing productivity at the expense of the environment and natural resources. Currently new approaches take too long to reach the ground and the practical needs on the ground are not sufficiently communicated to the scientific community. This EIP-A will ensure a faster exchange of knowledge from research to “practical” farming and provide feedback on practical needs to science via operational groups.

Martin Scheele’s presentation gives a number of examples of possible areas which might be addressed by the EIP-A:

Solutions for increased resource efficiency (soil, water, energy, fertilisers, pesticides,..) and reduced GHG emissions, e.g. ICT and satellite based precision farming, decision support systems for pest management, etc.

Solutions with respect to recycling, bio-refinery (biomass conversion to produce fuels, power, heat, and value-added chemicals), development of specific primary production (e.g. pharmaceutical plants)

Solutions for farm management beneficial to eco-system services and soil functionality (e.g. function green infrastructures, pest suppressive soils, etc.)

However, we are still awaiting the Commission Communication itself which will spell out how the EIP-A will work and how it will be coordinated with the agriculture and food research programme in Horizon 2020.

EIPs have been launched by the Competitiveness Council which has insisted on its active involvement in the development of further EIPs, so it will also be interesting to see how the possible involvement of Research and Industry Ministers as well as Agricultural Ministers from member states will shape the proposed EIP-A.

Brussels event

For those able to get to an event in Brussels, a conference and dinner debate on the Agricultural Productivity and Sustainability EIP is being hosted by MEP Luis Manuel Capoulas Santos in the European Parliament on 24 January next.

The purpose of the report was to examine where the economic, political and natural resource power currently lies in world agriculture, how that might change in the future, and what it means for British farmers. But the approach and findings clearly have a broader interest.

Sources of global agricultural power

The report raises three intriguing questions. What do we mean by global agricultural power? Why might it be important? And how can we measure it?

Power can be defined as the ability to persuade, compel or influence other actors to do something which benefits the actor or country exercising power. Power can be exercised by economic inducements or sanctions, by setting the ‘rules of the game’ or, ultimately, through force.

The report distinguishes three sources of global agricultural power.

• Economic power can be either public or private. Public economic power may be conferred by production capacity or importance in global trade. Private economic power is a function of the size, reach and concentration of the business firms which make up the global agricultural market at the different levels of food processing, trading and retailing.
• Political power is seen as the ability to set the agenda and to dominate the international organisations which set the ‘rules’ governing agricultural production and trade.
• Natural resource power is conferred by possession of the scarce resources needed for modern food production, such as land, water, energy and the minerals necessary for fertiliser production, and which are very unequally distributed across countries.

Report findings

The report argues that power in the global agricultural system is shifting ‘eastwards’ (towards the emerging economies) and ‘upwards’ (towards greater concentration in the hands of a smaller number of large corporations).

The report develops a ‘power index’ to make comparisons between countries. The index is constructed by ranking each country/region on a scale of 0 to 5 (where 0 means zero power and 5 means considerable power) for each power dimension and then summing the scores.

It concludes that the US and the EU continue to top the index by some margin. However, the index highlights their vulnerability in terms of natural resources. On the other hand, the emerging economies have lower political and corporate power but seem better placed in terms of natural resources.

Source: Scottish Agricultural College

It would have been interesting if the report had attempted to calculate and compare the rankings on the index over time. As it is, any inferences on how these rankings are changing over time are left to the reader. Of course, the scores that populate the table are subjective and based on the judgement of the research team, so perhaps too much should not be read into the particular numbers.

Concentration of export supplies

In at least one area the report seems too pessimistic. If we think about the economic sources of public power, this might be conferred because a country has a large import market (and thus is in a position to provide economic inducements, for example, by offering market access in return for concessions in other areas) or because it is an important exporter (and thus is in a position to threaten economic sanctions by withholding supplies).

It is not necessarily the case that globalisation is leading to greater concentration and specialisation on a smaller number of exporters, which might be seen as exacerbating problems of economic power. Taking one key traded commodity, wheat, as an example, the sources of export supply have become more diversified over time.

The report does not look explicitly at how the concentration of export supplies is changing over time. Economists use the Herfindahl-Hirschman Index (HHI) to measure market concentration for purposes of antitrust enforcement. The HHI of a market is calculated by summing the squares of the percentage market shares held by the respective firms.

For example, an industry consisting of two firms with market shares of 70% and 30% has an HHI of 70²+30², or 5800. The US Department of Justice uses certain rules of thumb to determine the degree of concentration of a market. It regards a market in which the HHI is below 1500 as “unconcentrated,” between 1500 and 2500 as “moderately concentrated,” and above 2500 as “highly concentrated.”

The figure below shows HHI indices for wheat exporters for the three years 1990, 2000 and 2008. I have calculated the indices for both export quantities and export values, and both treating EU member states individually and the EU-27 as a single bloc.

Global Wheat Trade Concentration IndexSource: Own calculations based on FAO TradeStat, figures for Wheat and Flour equivalent

The results are consistent in showing that the global wheat market, in terms of countries of supply, is relatively unconcentrated. More important, the degree of concentration has declined over time. Smaller exporters have got relatively bigger and new exporters have entered the market to challenge the dominance of the biggest exporters in 1990. Concentration ratios are, of course, higher when the EU-27 is treated as a single exporter but the trend remains the same.

Clearly, there are important power shifts taking place in the global food system, and this report makes an interesting attempt to define and measure these. From a global welfare perspective, however, it seems at least as important to know how concentrated/diffused power is as to know who exercises it.

This post is written by Alan Matthews

Picture on home page by odegaard on Flickr, and used under a Creative Commons Licence.

This medium-term outlook for the EU sugar market is based on a status quo assumption for agricultural and trade policy. The Commission notes that its CAP towards 2020 legislative proposal confirms the existing provisions on expiry of the regime after the marketing year 2014/15. Thus it argues that the policy assumption on the expiry of sugar quotas is in conformity with existing legislation.

In my own review of the legislative proposals I argued that the Commission’s decision not to propose an extension to the sugar quota regime after 2014-15 is a part of the 2013 CAP reform, on the grounds that this was the first time that the Commission had made its intentions clear. But formally the Commission is correct that the current legislation expires in September 2015 and would require a positive decision to extend it.

In my review I was surprised at the limited impact of removing sugar quotas that the Commission was projecting. This is confirmed in the sugar market balance projections to 2020 published in the market outlook. This balance sheet refers to centrifugal white sugar only. It does not account for other sweeteners (isoglucose), nor does it include sugar used for bioethanol (whether use for other industrial processing such as in the manufacture of medicines and enzymes is included is not clear) which is currently supplied from out-of-quota sugar. With sugar beet one of the top feedstocks for ethanol production in the EU, increased utilisation of sugar beet for ethanol in line with the overall increase in demand for ethanol is also projected.

It is striking how steady the market balance remains over the projection period. Sugar processing is expected to remain largely unchanged from its current level. Since the EU sugar reform, the EU has turned from a net-exporter into a net importer of sugar. Despite the expectation of relatively high prices and the end of production constraints following the expiry of the quota system, it is projected that the net-trade position of the EU will not change much during the projection period. This implies that the EU import market will still be available after 2015 for those developing country exporters that currently meet this demand.

This post is written by Alan Matthews