New CAP income payment could produce new policy failures

The new CAP reform has been promoted by its creators as being more target-oriented and better adjusted to what the public expects from the funds invested in agriculture. To meet these expectations and particularly to preserve as much funds for agriculture as possible, the first pillar direct payments have been veiled under various new support schemes. The most important ones are the basic payment scheme and its “greening” component. Let us focus on the basic payment, which will take up from 43 to 55 per cent of the direct payments envelope.

Politics trumps economics

The aim of the basic payment is unify the payments among the Member States and at the same time provide a kind of income support to agriculture. It could be understood as a single regional payment, i.e. a single payment per-hectare of all eligible areas in a region; the size of the region has not yet been defined, so far the condition was set at a minimum of 3 million inhabitants. The regional payment was available as an option already in the Fischler reform of 2003, but was accepted only by some countries, namely the more important ones and the net contributors to the European budget, such as Germany and majority of the Great Britain.

The proposal, therefore, does not unify the payments at the European level. Although this would seem reasonable in terms of levelling the competitive conditions for all European producers, looking at the income nature of payments, it does not have any particular sense, not least because of the differences in purchasing power and costs of agricultural production. Here, the reform-makers missed an opportunity to introduce greater objectivity in setting the level of payments across the regions. The decision to compensate for a part of the differences to those who receive considerably less by taking from those who receive more than the average European payment is of course merely a political one. Its real purpose is to preserve the greatest possible share of historical rights and to add something to the countries with lower payments, such as the new EU Baltic States and Romania and thus calm them down. This is obviously a political reality, with striking of balance between the interests being the basic goal of European integrations.

One size does not fit all

The second problem with the basic payment is its purpose. The reform-makers promote, sometimes more sometimes less bravely, the income nature of these payments. By this measure, agricultural policy is meant to promote higher standards by means of cross-compliance rules and at the same time contribute to greater competitiveness of European agricultural production. We cannot help but saying that this is a mere agrarian political storytelling. The truth is that the CAP preserves a part of the historical legacy that had been accumulated over years of price supports and later direct payments, always based on the support to very particular agricultural sectors. Also this is a political reality which, however, allows the creation of new failures of agricultural policy. It is these failures that we want to pay some attention to, as they are not very often a subject of debate of the CAP reform, neither on European nor national levels.

What is it about? The new defined basic payment actually neglects the different production capacity and income potential of different uses of agricultural land. A uniform level of payments would be justified if various uses of land could be fully interchanged, if different types of land would provide at least comparable profitability, let alone a comparative income, speaking of the income-related objective of this payment. By introducing a uniform level of payment for arable land, permanent crops and permanent grassland, the Commission ignored that individual types of land use are related to different labour inputs and other production costs as well as different potential returns and revenues.

Let us look at the difference between arable land and permanent grassland. It is perfectly clear to every agronomist, let alone a farmer, that the production of vegetables and crops is related to much higher costs as well as the revenue per area unit, compared to the potential costs of the extensive use of pastures and other forms of permanent grassland (which cannot be used or are not profitable enough to be used as arable land because of natural or soil conditions). Thus, the incomes from both purposes could differentiate at the ratio of 1 : 10 and even more. If the payments for both land-uses remain the same, they of course favour the extensive use of grassland. And this leads to new failures of agricultural policy. In the countries with such a system, it has already paid off and will pay off even more in the future to merely accumulate the hectares of grassland and collect subsidies for them with minimum effort, if possible even without livestock breeding.

Windfall gains for owners of permanent grassland

Introduction of basic payment would therefore produce, deliberately or not, new “profiteers” from public funds. I believe that this is where the goal of a better target orientation of the policy would fail as well as the reputation of the CAP after the reform. This problem is particularly serious in the regions with diverse land use and with a large proportion of permanent grassland. The proposal would lead to a substantial and irrational redistribution of funds among the producers and types of production and would also question the policy of less-favoured areas under the second pillar; it will particularly upset the conservative majority in European agriculture, who advocate the importance of food production and food security; and this is only a few negative consequences of such proposals.

Looking at Slovenia alone, the amount of funds for permanent grassland would almost triple, should the basic payment be introduced according to the current proposal of the CAP reform. This not only gives a completely wrong signal to agriculture, but also means squandering of tax-payers money. It could not be justified neither by the public goods argument nor by production de-coupling as one of the basic principles of the new agricultural policy.

Production decoupling concept means that the payment does not affect a farmer’s decision of what to seed, plant or breed on a certain agricultural area. This should be left up to natural or market conditions. This concept works for the arable land, where the use of land could optionally be changed, but not for permanent grassland. The only professionally correct alternative for grassland is grazing and mowing for ruminant and horse fodder, which takes into account the natural potentials of grassland and at the same time contribute to the preservation of landscape and biodiversity. These standards have been defined and make part of modern agronomic practice. The subsidy system should provide support to this type of land use, but it should set such conditions for the allocation and the level of funds that would cover the real costs of such use and moreover, that it would be in a proper relationship with other types of land use. And this is where the new proposal fails. The level of payments will be too high and will consequently encourage livestock breeders to increase the area of land instead of investing in proper technology, and thus collect more subsidies. And the incentives for a proper use of grassland leading also to sufficient stocking density  would be weaker. It would be the most profitable for breeders to have the fewest possible animals and the most possible hectares of land, as in this way their income goals would be the most easily met.

Perhaps, this problem could be avoided by better rules of good farming practice that would require adequate stocking density and the use of proper technology. But most countries do not succeed in this; they merely hope that this is the case. Which is not enough, especially as financial incentives work just the opposite. The conditions for payments lack any relation between the stocking density and the use of land, as there is fear that it could lead to production coupling and consequently disapproval by the EU’s partners in the WTO. Therefore, in some parts of Europe, the number of grassland areas for which producers receive subsidies increase, even if they provide only minimum management of land (with only 1 grass mulch) or they reduce the stocking density to the minimum (e.g. 1 animal per 100 ha or more). What we have in mind here is not traditional technologies typical for instance for Scotland, but a new phenomenon observed in some new Member States in the Alpine and also Mediterranean parts of the EU. It is about farmers who are farmers just to obtain subsidies and who fulfil their income goals only by subsidies. Perhaps, they have a few animals, although an increasing number of them only own grassland. From the agronomic point of view, this is intolerable, as the cultivation of hay for selling is not considered economically viable. In Slovenia, there are more than a quarter of agricultural holdings with grassland but no animals, but they apply for direct payments. Among them, there are less and less farmers and more and more mere land owners, who will have an increasing interest in the expansion of land, which they would rent out and if nothing else, split the subsidies with a tenant.

Public money, but few public goods

If the proposed basic payment is actually put in place, the effect of public goods from agriculture on the European grassland will be minor, a lot of public money will be wasted and the target-orientation and the reputation of the CAP will be dented. Of course, it can always be claimed that proper agricultural practice on these areas could be enforced by regulations. But, the truth is that the officials only do what they are told to and that Brussels is often too distant from the reality and not aware of the diversity of European agriculture. This particular problem is most likely too insignificant for them to even think about this dimension of the CAP reform. And the fact is that it is very difficult not only to regulate but also to control the proper use of grassland. These are usually very remote areas, and besides, very different uses and breeding technologies are possible in grassland management.

To conclude with, in some regions unifying of the payments per ha will lead to undesired effects in terms of target-orientation of agricultural policy. This will probably mostly be the case in the Alpine and Mediterranean parts and also in the vast lowlands of some new members in the very eastern parts of the EU, with mixed structure of land use. For the sake of the common sense, the negotiations on the new CAP reform should take account of the differentiation of the level of payments by the use of land. At the same time, a serious consideration should be given to the rules of the good farming practice on permanent grassland. Efficient and environmentally-friendly farming on permanent grassland is only possible by proper breeding of ruminants on active agricultural holdings. All the rest is anomalies, which have been or will be further created by the agricultural policy.

The Commission will have to admit that it failed to take account of some agronomical characteristics of agriculture. This will probably not happen. They will most likely say that if this poses a serious problem it should be voiced by Member States in negotiations. Thus, the decision will be left to the potential coalitions of Member States which could identify the problem of over-subsidizing of permanent grassland by the introduction of basic payment. As higher political levels usually do not deal with such issues – there the form is often more important than substance – we cannot be overly optimistic about any changes to the proposals. Anyway, let’s wait and see!

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One Response to “New CAP income payment could produce new policy failures”

  1. Alan Matthews →
    December 5, 2011 at 20:42 #

    @ Emil

    Thanks for this post. Your fear that the introduction of a uniform flat-rate payment per entitlement and thus per hectare will lead to massive redistribution among farms and farm types in those countries which adopted the historical model in the past is shared, for example, in Ireland, where the disparities in the value of the per hectare entitlements are particularly marked given the historical origins of these payments. There is significant opposition within the government and the farming organisations to a uniform system on the same grounds as your criticism above, that it will lead to a redistribution of payments from ‘active’ to ‘armchair’ farmers.

    As a matter of fact, however, I think you may underestimate the degree of flexibility in the Commission’s regulation. There is no reference there to a minimum regional size of 3 million inhabitants (which would mean that Ireland, as well as Slovenia, would have to be treated as a single region). The regulation specifically allows for regions (undefined in size) to be defined either using local administrative units or agro-ecological criteria. Indeed, this was confirmed on a visit to Ireland by Tassos Haniotis, the Commission official in DG Agri responsible for the reform proposals.

    The relevant Article 20 reads:

    1. Member States may decide, before 1 August 2013, to apply the basic payment scheme at regional level. In that case they shall define the regions in accordance with objective and non-discriminatory criteria such as their agronomic and economic characteristics and their regional agricultural potential, or their institutional or administrative structure.

    2. Member States shall divide the national ceiling referred to in Article 19(1) between the regions in accordance with objective and non-discriminatory criteria.

    For example, England has introduced a regional model and has declared three regions: Severely Disadvantaged Areas, moorland within SDAs, and all other land (which is the more fertile lowlands). In principle, the same option is open to other member states who wish to prevent a large transfer to lowly-stocked grassland which they do not think is justified.

    However, you are right that this approach still does not fully address the fear that ‘armchair’ farmers will benefit at the expense of ‘active’ farmers. Adding production-type restrictions such as minimum stocking rates to the GAEC criteria risks underming the Green Box status of these payments. Ultimately, the problem cannot be solved by tinkering with the conditions for receipt of the basic payment. It is the untargeted nature of this payment iself which is the problem and which needs to be addressed.