The author (pictured, below) is a former Member of the European Parliament and currently a Transatlantic Fellow of the German Marshall Fund of the US. He also has a small farm in Portugal. This is the first in a series of guest posts on capreform.eu.

You will understand that – minor as it might seem – the point that got most of my attention in the paper presented today by the Presidency of the European Council on Agriculture was the one on olive oil. After all, as an olive-oil farmer I have a vested interest on the issue, and therefore I was taken by surprise by reading that the Presidency considers “the authorisation of the private storage of olive oil in 2009, which contributed to a recovery in prices and subsequent market stabilisation” as an example of the success of the existing market control mechanisms.

As I am being paid 50% of the price I received for my olives a couple of years ago – 30 cents a kilo instead of 60 – I have some difficulties getting the point of the Presidency. It is true that when I started harvesting back in November, the local buyer told me he could not guarantee more than 24 cents the kilo, which would probably not cover harvesting costs, and so he presented his 30 cents offer as a generous move.

In the Brussels world of free competition, I could sell my olives to somebody else, but in the real world of Vale do Vargo, the only competitor is a co-operative that is practically bankrupt and pays for your olives in kind (gives you olive-oil in return) which is not a very practical form of payment. In the neighbouring village the local co-operative closed long ago, and several practicalities make it difficult for me to deliver my olives to longer distances.

So, I could think of milling the olives myself, or I could think of asking my south-eastern neighbour to mill them for me. But, well, all the traditional olive mills have been closed, according to the national authority’s explanation, because of Brussels directives. In fact, Brussels directives only told member states that waste water resulting from the milling process of olives should be correctly disposed of, and this did not mean closing down hundreds if not thousands of olive mills across the country, but Portuguese national bureaucracy saw here another golden opportunity to “modernise” by decree this old-fashioned rural country and made a very restrictive interpretation of the directive.

My short farming history started exactly when I was nominated for a report on olive-oil in the Budgets Control Committee of the European Parliament and I got so fascinated with the various dimensions of the issue that I decided to see for myself how to deal with olive groves. I never thought of my olive trees as a business, but as a hobby. Nevertheless, I expected it would be much less expensive than it turned out to be. As I soon understood, many of the olive groves around my own are held as a hobby by people working in nearby towns or villages. They have a small plot of land, something like one or two “sortes” – over there it means from 2,5 to 7 hectares – they take care of them on weekends and they are very happy if the payment for olives will cover their costs, excluding their voluntary work.

Normally this is a population that likes to keep old ties with inherited land or inherited rural habits, and that is emotionally involved with the farming cause, as much as if their livelihood would significantly depend on these plots of land. Then you have those who still make a living out of these traditional olive groves, and they must explore at least some 30 hectares of land. They keep traditional olive trees, but they already use mechanical collection and a lot of chemicals with which they kill all existing vegetation between olive trees and combat major pests. Sometimes they irrigate their olives as well.

The past years have been dramatic for this group. After severe droughts that limited production they now face sharp drops in prices. In the last five to ten years most of the olive grove scenery of Southern Alentejo changed dramatically, with the implantation of huge intensive olive oil groves. Invariably using irrigation, they multiplied by a factor of five to ten the number of olive trees per hectare, although using young and small olive trees that will not be allowed to get old. These new farms use more efficient olive-picking machines and the same chemical approach as the traditional commercial farms.

Most of the new olive groves were planted by Spanish investors, and because of the overall economic crisis, investment dried up in 2008, and several of these olive groves are for sale. Up to 2007/2008 – that is before these new olive groves started producing – the Portuguese olive-oil production was steadily declining, as in the absence of major modernisations, traditional production was just uncompetitive. This situation had, however, a positive aspect: prices remained firm. As the Portuguese consumer gives a premium to Portuguese olive oil and the national production was far below national demand, there was a premium for the national olives.

As the European Commission has been subsidising private storage of olive oil and – unless there will be bad climatic conditions – everything points to a steady increase of olive production for the next few years, I believe the private storage that the Presidency’s paper presents as the symbol of success in the intervention of markets will certainly play a role in damping future prices. It is awkward that a Presidency that happens to coincide with the largest European olive oil producer member state does not even consider the possibility that what I am presenting here as my personal analysis may become a reality.

If we were to analyse carefully the effect of the use by the EU of massive storage measures – milk products, beef, and grains – when the problem was more structural than short-term, I think we would confirm my point of view. What my accidental farming experience together with my administrative, political and academic experience tell me is that we are facing a structural challenge that has to be considered in several angles: technical modernisation; environmental impact in water, erosion, biodiversity and landscape management; rural policy; budget and budget control issues and food quality.

In our Mediterranean conditions, a traditional olive grove – intermingled with fig and almond trees, cork and green oaks – with centenary olive trees where you can easily find bees-nests, lizards, all sorts of insects and birds, even refuge for rabbits, with a lot of other species of plants in between where you occasionally spot hares, pheasants or wild boars is a wonder of nature. In the past, it allowed the presence of the “gland pigs” – that strive better in oak forests, but that go as well on olive groves – that would eat grass and plants, the figs and the fallen olives – and thus preventing the reproduction of pests like the fruit fly – alternating with lambs that would eat the grass and occasionally would prune the unwanted lower branches of olive trees. The main problem is that you need to give a close eye on what these animals are doing to prevent them misbehaving, and this is time consuming and less competitive than the alternative of spraying chemicals around.

Hand-picking of olives has been out of the question for quite some time and the standard traditional method has been for many decades to hit the trees with a stick, and collect the olives with a net by the ground. This is quite a rude method that destroys the productive capacity of the tree and is still time-consuming. Lately, huge machines that help shaking the tree have been used, but this is much more cumbersome, expensive and time-consuming than to have small aligned olive trees that you can handle like a fruit tree orchard.

As decoupling of aids from production only very recently and still partially arrived at olive production, and decoupled payments are made on the basis of historic production, the Common Agricultural Policy actually became a further disadvantage to the traditional olive grove, as it gets a much smaller subvention than the intensive one.

So objective technical and market conditions – reinforced instead of balanced by the CAP – made impossible to the traditional olive groves to compete with the new intensive ones. The new, intensive olive groves were classified by a DG-Environment European Commission report as the number one cause for soil erosion in Spain, washing annually millions of tones of earth from the fragile Mediterranean soil to the sea. They also represent a drain on scarce water resources, they have a negative effect on biodiversity and, last but not least, they are not beautiful in the landscape as the old ones are.

But if these obvious failures of policy were not important enough, the budget control framework of the European legislation made things considerably worse. Either because the Commission once proposed to replace the payments per olive quantity by a payment per olive tree – proposal flatly refused by the industry – or for some other less transparent reason, the budget control mechanisms of the Commission rely solely on counting the number of olive trees.

As an explanation for this extraordinary practice, the Commission said that counting the number of trees was an indirect way of counting olives, assuming approximate fixed productivities per tree in each particular region. This is sheer nonsense for two reasons: the first is that the main variable on which productivity depends is the intensification degree, not the region where an olive grove is situated; the second is that with extensive methods variability is very high depending on climate variations.

However it goes beyond belief the enormous amounts of effort and public funds put behind this absurd task of counting olive trees. Brussels gossips – completely out of the blue – were that plastic trees were being planted in Italy to deceive the controllers. This would have been double foolishness, as a real olive tree is cheaper than a plastic one and no-one ever got a cent from the European Budget for having an olive tree, but only from producing olives, and plastic trees do not produce them as real olive trees do. The first thing I was told when I bought my olive grove was that I should be very careful in stating a number of trees considerably lower than reality. Otherwise, I would risk seeing the controllers coming, deciding several of my olives were not in good production capacity and condemn me as a fraudster. In the olive oil business fraud comes from making olive-oil without olives, not olives from plastic or almond trees, as it is apparently reasoned by the Commission.

Fraud in olive oil traditionally attains alarming levels, much higher than in milk products or wine, two of the other traditional victims. According to a press report I quoted in a Parliamentary question to the Commission, falsification of olive oil reach 50% levels in some European markets. The Commission was not impressed, and answered this was a detail for member states to be concerned with.

From all of this, I think we can understand what should be done on this sector, quite differently from what as been done lately.

1. Limit market intervention to exceptional circumstances. Do not make a system out of it. If the crisis situation lasts, think of structural measures;

2. Phase out existing subventions and replace them by a system that rewards olive production for (1) biodiversity enhancement; (2) soil conservation and (3) water saving;

3. Promote or subvention research in technologies that will increase human productivity with extensive use of natural elements;

4. Promote or subvention the personal or collective use of machinery that replace burning and pesticides.

5. Couple these measures with rural policy and social policy towards those who will not be able to keep the market competition pressure, as Sicco Mansholt thought necessary from the beginning.

6. Make war on those who make olive-oil without olives, stop harassing farmers for ludicrous reasons;

7. One of the last but very important decisions of former Commissioner Fisher Böel was to send her staff for visits in the countryside. Enlarge the measure to the other European institutions, everyone being invited to reflect all of these issues walking along old olive groves… Be my guest!

The EU dairy market is now recovering from the severe drop in milk prices in 2009. Perhaps the clearest sign of this recovery is the setting of export refunds on dairy products to zero since mid-November, as world market prices for dairy products have strengthened in recent months.

It is thus an opportune time to evaluate the EU’s response to the crisis, and to see what lessons might be drawn for how the Union can address similar problems in other farm sectors in the future. My view is that there is a lot to be learned from the dairy crisis, and that the outgoing Commissioner deserves credit for the way she handled it.

EU milk prices improving

Let us first review the evidence that the milk market is improving. The trends in the EU market prices (proxied by the German price and represented by the blue line) and the EU intervention price (the red line) for butter and skim milk powder (SMP) have been graphed by CLAL.it and are reproduced below.

The German butter price is now back to the level of 2002 before the cuts in intervention prices. The recovery in SMP prices has not been as strong, but even so these are now comfortably above intervention levels. EU dairy farmers also benefit from an additional €5 billion per year in the form of direct payments (3.5c/kg milk) to compensate for the reductions in intervention prices.

Farm prices are responding to the better prices for dairy products, although with some lag. The average EU price for standardised 4.2% fat milk, according to the LTO, has risen to €27.06/100kg in October 2009 from its lowest point of €23.74/100kg in April. It is now back at the levels of Spring 2007, before the big run-up in prices in 2008.

The recent USDA market outlook for dairy products in 2010 foresees continued strong prices into 2010 as economic growth recovers particularly in developing countries. While the large stocks of SMP in particular overhanging the market are seen as a negative factor, it observes that in the US most of these stocks are committed for domestic food programmes and that the EU is unlikely to release its stocks on to the market soon for fear of the political fallout from producers.

The Commission’s response to the dairy crisis

Assuming that prices continue to strengthen throughout 2010, it is useful to review what lessons were learned for crisis management when faced with a substantial fall in the price of a farm commodity. The Union’s responses to the collapse in domestic milk prices in 2009 can be divided into market management measures and income support measures.

Among the market management measures were

In total, the Commission expects to spend up to €600 million on market measures this year.

Among the income support measures were:

Reflections on the Union’s response to the dairy crisis

A first observation to make is that, while the Commission did resort to market management measures such as intervention and export subsidies, much more emphasis on this occasion was put on income support measures.

It was noticeable that the Commissioner firmly set her face against any increase, even temporarily, in intervention prices and against a reduction in quotas, arguing that both would be against the spirit of the Health Check intended to move the CAP in a more market-oriented direction.

Although the future of export refunds after 2013 is uncertain (the EU has committed to their elimination but only in the context of a successful outcome of the Doha Round in which similar disciplines applied to other forms of export support), it is likely that the greater emphasis on direct income support measures in response to crisis is here to stay. While the loud voices calling for stronger support measures as part of a food security policy for Europe would doubtless like to see stronger market management measures, these are effectively beggar-my-neighbour responses unless undertaken as part of a global framework (e.g. a global stocks policy).

A second observation is that the income support measures included both a relaxation of state aid restrictions (allowing Member States to fund payments to producers) and a Community scheme. While the national state aids were permitted only in the context of a measure taken as part of a wider response to the economic crisis, they do flag a possible direction for future responses to agricultural market crises. When the figures come in, it will be interesting to assess how much use the individual Member States make of this opportunity.

A third observation is that the payments will be made to producers only with a lag (the exception is the speeding up of the disbursement of the standard Single Farm Payment). This means that payments will reach farmers after the crisis has passed and when incomes are already recovering. Clearly, payments should reach farmers at the time when they are most needed, and hopefully the decision to allow the Commission to respond to future dairy market crises on its own initiative may facilitate this in future.

A fourth observation is that there is now little headroom in the EU budget up to 2013 to fund unexpected crisis management measures. The outgoing Commissioner has made clear that funding the €300m emergency aid from the 2010 budget has utilised any remaining headroom and, apart from the use of the safety margin, any further call on the agricultural budget would trigger the financial discipline mechanism requiring a cut in direct payments.

Price volatility on agricultural markets is expected to increase in future (though whether this is a reasonable presumption to make deserves further analysis, and the outcome depends on the interaction between production shocks and their distribution where climate change is expected to increase volatility, trade policies and their implications for price transmission from world to national markets, and government behaviour particularly with reference to stocks).

Presumably these lessons will be analysed by the High Level Experts’ Group on Milk which is looking into the medium and long-term future of the dairy sector and which will deliver its final report by the end of June 2010. A very useful input is the report on price volatility in the dairy sector commissioned by the European Dairy Association and written by my Irish colleagues Michael Keane and Declan O’Connor.

The 2009 EU dairy market crisis was handled well by the outgoing Commissioner. There was no back-tracking in the direction of CAP reform, and a number of innovative new instruments to address income volatility in a particular sector are being tested. The lessons learned from this experience will be an important input into the discussions on the shape of the CAP post-2013.

Update 5 January 2010: When writing this post, I had not seen that the French have made use of the national state aid provision to provide up to €700 million to farmers affected by the crisis. Aid under this new scheme can be granted until 31 December 2010 and will take the form of direct grants, interest rate subsidies, subsidised loans as well as aid towards the payment of social security contributions. See http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1866&format=HTML&aged=0&language=EN&guiLanguage=en,