Specious arguments against limiting payments to largest farms

Initial media reaction to the Commission’s Health Check proposals has been predictable, with most papers picking up as the lead story the Commission’s proposal to apply a tapering reduction to direct payments to larger farms. The Financial Times story was headlined “Communists and royalty fight farm subsidy cuts.” Much was made of the fact that the Commission’s illustrative proposals would reduce the payments received by the Queen of England, who apparently received £465,000 (€650,000) in 2005, by over £140,000 (€192,000). British and German officials were quoted as saying they would oppose these reductions as they were unworkable and undesirable.

The British position, in particular, appears to sacrifice long-term political credibility in pushing for CAP reform for the sake of short-run political expediency. Mythical farming entities are created, as when the UK spokesperson argued that many large farms are co-operatives set up to enable small farmers to benefit from economies of scale. I look forward to Jack Thurston identifying these mythical farming cooperatives from the UK rich list of farm subsidy recipients over at farmsubsidy.org.

The spokesperson also argued that larger farms may offer greater environmental benefits than smaller ones. Indeed they might, but then again they might not. This is because there is no linkage in the direct payment scheme between the level of payment received and the level of environmental services provided. This link is made, of course, in the agri-environment schemes in Pillar 2, and the UK government seems oblivious to the fact that the money taken from capping the very large payments in Pillar 1 would be recycled in their entirety to Pillar 2 expenditure in the UK under the Commission’s proposals.

The spokesperson also objected that it would be perverse to penalise the most efficient farms when the EU wants to wean the sector off subsidies in the longer run. Lets leave aside the implicit assumption that efficiency and viability are one and the same thing. Many smaller farms may be as efficient as larger ones but may not be viable as full-time farms if the absolute income being earned is not sufficient to offer a comparable living standard to occupations off the farm.

More important, the statement reveals a mindset in which the single payment is still seen as a payment to production agriculture rather than decoupled from production (if still tied to land and thus in part capitalised into land values). All farms now make their production decisions on the basis of prevailing market prices, and limiting the single payment to larger farms will not alter the relative returns they receive, nor their profit-maximising level of output, compared to smaller farms.

Of course, it may affect their liquidity and creditworthiness, and thus there could be production distortions through these indirect channels. However, the liquidity position of farms differs enormously anyway, depending on the asset position of the farm household, whether the farmer and/or spouse has off-farm income, and so on. It does seem perverse that ordinary taxpayers should contribute to an improvement in the liquidity position of the around 6,100 wealthiest farmers (in the UK) which the Commission’s proposal would affect.

The official finally went on to point out that if it is a payment for looking after land, then the more land you have the more you should get. This, of course, gets to the nub of the problem, because nowhere is there a clear explicit statement that this is indeed the justification for the Single Farm Payment. Indeed, nowhere in the Health Check document is there any statement of the objectives of the Single Farm Payment now or in the future. The document calls for making the Single Payment Scheme more effective, efficient and simple, but how can we determine how to make it more effective if its purpose is nowhere spelled out? And if compensation for looking after land is the objective, why do farmers in the more intensively farmed parts of Europe get more money for doing this than farmers in more fragile and vulnerable environments?

It is to be hoped that, over time, the British government will see the speciousness of their arguments and come round to support the Commission’s proposal. But that does not take away from the fact that the proposal, even if implemented, will have little more than an optical effect. In fact, the other Commission proposal in the document, to increase the rate of compulsory modulation from 5% to 13%, would actually be rather more effective in limiting Pillar 1 payments to wealthier farmers.

This is because of the operation of the franchise which exempts the first €5,000 payments from modulation. Over 80% of EU farmers received less than €5,000 in direct payments in 2005, so would be unaffected by the increase in the modulation rate. Applying the additional compulsory rate of modulation of 8% to the remainder (on their payments above €5,000) would remove around €1.7 billion in Pillar 1 payments from the richest 20% of farmers. In contrast, the Commission’s tapering proposal would yield a more modest €0.5 billion.

Admittedly, the burden would shift from the really wealthy to the fairly wealthy, in that the Commission’s tapering proposal would target the top 0.4% of farm recipients while modulation will affect the top 20%. Nonetheless, it is important to keep the relative efficacy of the two instruments in engineering a shift from Pillar 1 to Pillar 2 in mind, and not to lose sight of the fact that an increase in compulsory modulation is the more important proposal of the two.