The European Commission has concluded in its communication on the post-2013 CAP that the CAP must preserve the EU’s food production potential, ‘so as to guarantee long-term food security for European citizens’. Similarly, ministers of agriculture from 22 member states claim in their Paris Declaration that ‘only an ambitious, continent-wide policy can safeguard Europe’s independence’.

Surprisingly, however, there are no scenarios and no calculations to substantiate this perceived threat. Only the Department for Environment, Food and Rural Affairs (Defra) has conducted a Food Security Assessment. The lessons are clear-cut: there are no discernible dangers for the UK. In a recent working paper, I have looked at the entire EU.

EU food production per capita has constantly increased in the past and far outstrips dietary energy requirements. The share of income that households spend on food has steadily declined. By now, food prices are so low compared to income that even a 10-fold increase in the farm gate price of staple crops would be far off from provoking food scarcity in the EU. Forecasts predict roughly stable or increasing production quantities for the EU – even in the case of subsidy and tariff cuts. The expected main effect of climate change during the coming decades will be to shift production from southern to northern Europe without significantly curtailing overall production.

If food prices rose dramatically, the EU could increase the agricultural area used for growing cereals; in particular, by cutting back on biofuel and livestock production. Furthermore, agricultural labor and capital input could be multiplied. An additional measure would be to enhance investments into agricultural productivity.

The EU does thus not depend on imports for its food security. Still, it’s interesting to have a closer look at EU food imports. Since food prices are so low compared with EU wealth that the EU could afford sufficient imports even if prices rose tenfold (always speaking of basic staples, not caviar and passion fruit), only export restrictions could impair the EU’s import potential. A number of considerations show how unlikely this threat is.

Agricultural markets are becoming thicker: world food trade has increased by 230% between 2000 and 2008 according to the FAO. The greater the volumes, the more food can still be bought on the world market if a given amount of supplies is interrupted.

Export concentration has been low, or at least decreasing, during recent decades in the most important agricultural markets, as Defra notes in its Food Security Assessment. The concentration of countries’ share in world food exports matters because export restrictions are more lucrative and can be more easily upheld if most of the market is in the hands of one or few suppliers.

A significant share of EU imports comes from highly reliable exporters: the US, Switzerland, Canada, Australia and New Zealand. These countries could greatly expand their exports to the EU if the need arose. The other main source of exports to the EU, South America, is decently stable. The figure below shows the market shares of key exporters to the EU (it stems, as the following figures, from the DG Agri MAP newsletter).

Food is a homogenous good if the issue is not taste but calories. If exports of wheat were seriously curtailed, they could be replaced by rice, maize and other grains. Export restrictions are therefore less harmful to importers and less attractive to exporters.

Food is mostly traded on a spot market and can be easily transported. Food thus differs greatly from oil and gas where imports hinge on long-term contracts, pipelines and suitable refineries.

Food production in major exporting countries can be more easily increased than energy production (beyond currently available capacity) as the latter depends on long-term capital investments. If some suppliers restrict their exports, it is thus easier for their competitors to pick up market shares.

No prolonged and encompassing phases of export restrictions have occurred since the Second World War. Export restrictions taken during the 2007/08 price spikes were usually of short duration and limited to one or a few products.

The EU imports relatively little staple food. Most agricultural imports are either feedstuff (soya), ‘luxury’ products (coffee, tea, tobacco, sugar, exotic fruits, meat, food preparations) or products with multiple non-food uses (palm oil). The figures below show this at a highly aggregated level and for the main imported products.

All readers are cordially invited to discuss these issues at a lunch seminar at ECIPE in Brussels on January 26.

- The common position endorses further moves towards greater market orientation in the CAP but suggests countervailing measures are needed “to buffer devastating effects of growing price volatility and market crises”.

- There is nothing concrete on the future budget of the CAP and it is stressed that “a final decision on all questions relating to finances will be made when decisions are made on all policies and the entire EU financial framework”. In other words, there is not going to be another stitch-up like the Chirac-Schroeder deal of 2002 which effectively fixed the CAP budget for the next 11 years, short-circuiting the normal EU budget-setting processes.

- The two pillar structure of the CAP should be maintained, and no national co-financing should be required of pillar one expenditure (i.e. direct payments and market measures). This is something of a surprise, coming as it does from Germany, the major net contributor to the CAP and France, that is soon to become a net contributor. Co-financing is one way for net contributor countries to improve their budget balances.

- Once the budgets of the two pillars have been decided, there should be no need for modulation of funds between the pillars.

- While new measures may be needed to meet new challenges and objectives, these must “take very carefully into account the financial implications for each Member State.”

- It is argued that “EU standards must be met by all imported products” though it is not clear whether this relates to methods of production or EU sanitary and phytosanitary standards, which imports must meet already.

- The common position states that “In some sectors we need more transparency and more market power for the producer” and suggests some methods by which this could be achieved.

- “Decoupled payments have to remain central in any future system.” The common position argues that “direct payments provide remuneration for public goods that are not rewarded by the market, cover production cost caused by higher production standards desired by society and they contribute to the income of farmers and are an essential part of the risk reducing safety net for European agriculture”. France and Germany reject “EU-wide flat rate” for direct payments and argue that direct payment rates are to be set with regard to net budget positions of member states. Effectively, this is France and Germany saying they don’t want to pay any more for direct payments to Polish and Romanian farmers.

- Member states should investigate, on a voluntary basis, insurance and mutual funds, as a method for stabilising farm incomes over time.

- The countries support greater national flexibility in rural development policies and in “distribution of direct payments within a Member State”.

What should we make of the common position? It reads rather as though France’s main priority is to secure its own position on the CAP, which is to preserve the status quo with the addition of measures of the kind that were introduced as emergency measures during last year’s milk price crash. Germany, which also has concerns about price volatility, is additionally looking to constrain the CAP budget (and the EU budget more widely) and protect its national budgetary position.

The 5-page document can be downloaded from here (PDF).

The study looks at three scenarios. The reference case assumes a 20% (nominal) CAP budget reduction, reduced intervention stocks, full decoupling, a 30% direct payment reduction, a 105% increase for the second pillar, and a moderate Doha agreement (based on the Falconer paper, including the elimination of export subsidies). The conservative scenario presumes that the Health Check results are largely maintained, direct payments reduced by only 15% and second pillar payments raised by 45%. The liberal scenario is very liberal indeed, with a 55% CAP budget reduction, no intervention stocks, no direct payments, a 100% increase for the second pillar and no tariffs.

Among the most interesting results is that the volume of crop production will grow slowly in all scenarios (around 0.25% per year). Even the vulnerable livestock sector loses only 4% in the liberal scenario over the entire 2007-2020 period. Agricultural land use remains roughly unchanged in the reference and conservative scenarios, and declines by a mere 6% in the liberal scenario (due to the decline in the EU-15, driven mostly by the abolition of the Single Farm Payment).

More significant differences arise when it comes to land prices. These remain largely unchanged in the reference and conservative cases, but decrease by 30% in the liberal scenario. This is nothing the public need worry about – but it explains the heavy lobbying of landowners for the preservation of a ‘strong’ CAP.

The study also analyzes the situation of rural regions. It concludes that strong rurality is not synonymous with negative economic or demographic trends. 422 regions have a negative and 435 regions a positive demographic trend (with negative developments in the eastern Member States and at the southern and northern borders of the EU). The study also finds that ‘There is no evidence that the EU-27 regions with an above average agricultural employment are generally showing negative reactions. Hence, it shall be emphasised that rurality and agricultural vocation are not a sign of weak development perspectives.’ This further undermines the rural development approach of the CAP that spreads money to all rural regions, often in positive correlation with their agricultural production.

A last point to consider: surveys of life satisfaction and happiness give very similar results for urban and rural areas. Since ‘happiness’ is in vogue (and heads of states from Bhutan to France argue for happiness accounting to complement GDP figures), why worry if rural regions have a lower GDP per capita, so long as people there are equally satisfied?

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,

What is likely to happen, judging by past experience, is that exporting countries like New Zealand will lower their prices in response in order to retain global market share. The net effect is that world prices are depressed even further and this does not help EU producers or certainly not the more efficient ones who are seeking to compete on the world market.

Wheeling out the old policy instruments may give partial satisfaction to farm lobbyists, but it is not really going to help prices or farm incomes. The unpalatable fact is that an internationally competitive EU dairy industry might have a better chance of bringing prosperity to EU dairy farmers. But that would mean marginal farmers in politically sensitive areas like Bavaria and Britanny going out of production. And that is too high a price to pay for a net efficiency gain.

Environmental Defense, a US conservation group, has joined with 14 other NGOs in calling on Congress to resist pressure to release 24 million acres from the Conservation Reserve Progam (roughly three quarters of all land currently enrolled in the program). The letter says:

“We urge you to protect the taxpayers’ investment in soil quality, water quality, and wildlife habitat and not allow landowners to leave CRP contracts early without fully reimbursing the Treasury for the taxpayer-funded investment in those lands.”

Currently, conservation contract enrollees who terminate their contract prior to the end of its 10- to 15-year term must reimburse the federal government for the rental and cost-share payments they have received, plus interest, and a penalty of 25 percent of the total rental payments received.

It is important to note that there is a major difference in emphasis between EU and US conservation programmes in that EU schemes are less about land retirement and more about improving practices on working lands. A European farmer who puts land into an agri-environment scheme is not required to abandon all production on the land, rather to farm the land according to higher standards of soil and conservation, apply fewer agrochemicals and take action to benefit wildlife and biodiversity.

In cases where EU agri-environment schemes do entail a significantly lower intensity of production, I have no doubt that many European farmers are already considering whether it’s worth staying in the scheme.

Several funds have been set up to buy farmland, particularly in the UK where prices have risen 40 per cent over the last year. Manchester-based group Braemar had to close a fund it launched after two weeks. Higher commodity prices have also attracted institutional investors such as Blackrock and Schroeder.

Good quality arable land in the UK is fetching £6,000-£8,500 an acre in many parts of the country. Buyers from Denmark and Ireland have been piling into the UK for several years. Some estimates suggest that as many as 30 to 40 per cent of buyers in the eastern countries of England are coming from overseas.

Land prices fell between 1997 and 2003 in the UK after the BSE and foot and mouth crises. The price could rise to £8,000 – £10,000 an acre, close to the price in parts of Denmark, but industry experts predict that it will rise more slowly from now. One factor who has been ‘lifestyle buyers’ who run farms as hobbies rather than businesses, while field sports are a factor in purchases within reach of London.

There are considerable variations in land prices across the EU. In Lithuania a hectare of agricultural land cost €734 in 2006 compared with €164,340 in Luxembourg, the most expensive country. In Poland the average price rose 60 per cent between 2003 and 2006. Foreigners cannot buy land in Poland until 2016 but it is easy for investors to set up a local company to bypass the rules.

In France land is about €6,000 a hectare because it must be offered first to young local farmers. However, land prices are still 50 per cent up on 2003.

Senator Grassley knows full well that for the past few years, a full 30 per cent of maize grown in the US is grown not to feed people but to feed automobiles, for the very good reason that a good part of it is grown and refined in his very own home state of Iowa. The notion that withdrawing such a huge volume of land from food production could have any impact on the availability and affordability of food is clearly beyond the Senator’s grasp of basic economic theory. But then again, we are talking about a longstanding member of the Senate Agriculture Committee, the folks that only last year dreamed up a new $5 billion ‘permanent disaster aid program’ to give handouts to farmers in parts of the US where it never rains.

When he was Chair of the Senate Finance Committee, Grassley authored the massive tax breaks that began the ethanol boom. For those who are interested in economic analysis, biofuels are thought to be responsible for between 10 and 25 per cent of recent increases in food prices. The other drivers of price rices include a high oil price, bad harvests in several parts of the world, speculation in commodity markets by investors, decreasing government strategic food reserves and the increased consumption of livestock products in the growing middle classes of Asia and Latin America.

But back to the press briefing. As a performance, it’s a cross between the self-consciously folksy shtick of vintage era Donald Rumsfeld and the cringe-making, rabbit-in-the-headlights inanity of President Bush. In the video I’ve cut in a few choice passages from a rather different speech Grassley made at a New Baptist Covenant meeting at the Carter Center in Atlanta, Georgia, earlier in the year.

Listen to Senator Grassley’s infamous ‘Let them eat rice’ declaration in full

[audio:grassley_audio.mp3]

“I read about the riots over the price of food. It’s bread in Egypt and it’s rice in China, er, I mean Thailand, and maybe other places where they have some riots, but… I don’t see any… I saw a little bit of concern in Mexico maybe three months ago on tortidos. Is that what you call them, tortidos? [Aide: "Tortillas"] Tortillas. And er, and er, but, but, y’know, we don’t make, er, ethanol, out of rice and out of wheat. So I’m not sure that I understand except ignorance on the part of people about the connection between making ethanol and making, and, er, food. Because I could set a bucketful of corn in front of those people from the IMF or we could go where they’re compaining. And they wouldn’t know what to do with it. Any more than I would know what to do if an eskimo set a pale full of blubber in front of me. So, er, so I’m not very sympathetic toward it at this point. When they start getting a connection between corn and food, then I’ll be glad to listen. Part of our problem is that Chinese are going, er, to eat meat. And you’ve got to have corn and soybeans to feed the Chinese, their meat, then why isn’t it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol.”

Can this be the same Chuck Grassley who opined that “turning a blind eye and a deaf ear to world hunger exposes the selfish side of human nature.” With US corn at record highs of $6 a bushel, the selfish side of Chuck Grassley is very much exposed!

Here in the EU, politicians are falling over themselves to recant on any earlier backing of food-for-fuel policies. But for as long as selfish, hypocritical, pork barrel merchants like Chuck Grassley are driving the policy, the US will continue marching down this most crooked of roads that is doing so much harm to world’s poorest people and to the environment.

Of the three remaining candidates to be the next US President, only one has a record of opposing ethanol boosterism: John McCain. The Washington Post recently reported on a physical altercation between Grassley and McCain, though this was NOT over ethanol subsidies. It did lead the pair to be on non-speaking terms for two years, though it is said that they have subsequently patched things up. I’m told that Democrat front-runner Barack Obama has well and truly drunk the biofuels kool aid while Hillary Clinton is just desperate to woo farm state super-delegates as she battles to stay in the race for the Democratic nomination.

If changing EU policy on biofuels feels like turning around a supertanker, changing US policy is more akin to pushing an avalanche back up the mountain.

You can read a transcript of Zoellick’s press briefing here, and the analysis note which includes a discussion of the policy options available to address the problem of food affordability in developing countries.

I will turn to what the end of the era of cheap food means for the CAP in a forthcoming blog post.