It can also submit opinions at the request of one of the other institutions of the Union, and it has just released an opinion on the Commission’s legislative proposals for the CAP post-2013 announced in October 2011.

The opinion focuses on whether and to what extent the Commission’s legislative proposals remedy weaknesses already identified by the Court following its audits. Subsequently it presents some further reflections resulting from the Court’s analysis of the proposals.

The opinion is comprehensive, addressing issues in all four of the main draft regulations in the Commission’s package. One of the guiding principles behind the Court’s observations is whether the proposals facilitate sound financial management by shifting from the current focus on compliance and financial implementation towards a performance-based system, with clear objectives and criteria against which performance can be measured. In this respect, the Court is not impressed:

Despite the claimed focus on results, the policy remains fundamentally input-based (expenditure oriented), and therefore oriented more towards compliance than performance. In particular, the objectives established for direct payments to farmers within the framework of the CAP are not disclosed in the articles of the regulation, nor are their expected results, impacts and indicators. For rural development, a disparate and wide ranging set of objectives are laid down in the regulation which does not include either their expected results and impacts or relevant indicators. Similarly, the objectives and expected results of cross compliance and the ‘greening’ component of direct payments are not adequately defined. The disclosure of these elements would help to focus and target the policy on delivering the desired results.

The Court is also concerned about simplification of CAP regulations, which it relates to the level of administrative and compliance costs which member states and farmers must incur in administering the policy. On this issue, the Court comments as follows:

The limited simplification and additional administrative burdens introduced will have an effect on the costs of the reform which the Commission estimates are likely to represent an increase of 15 % overall. Member States consider that the percentage increase in costs may be even bigger. The Court notes that no information is available to show to what extent these additional costs will be offset by increased management effectiveness or efficiency in delivering the policy.

The opinion also contains observations on other issues that the Court has raised in its audit reports, including confining aid to active farmers, capping and improving the distribution of aid, and improved targeting of investment support to rural areas.

The question is whether the Council, Parliament and Commission will respond to the Court’s criticisms, and how?

EU expenditure on Agriculture and Rural Development makes up a high share of total EU expenditure. The share was – according to official information – 41 per cent of total EU expenditure in 2011 and amounted to €55.269 billion. The position ‘Direct Payments’ was the most important budget outlay during the present Financial Framework with €39.771 billion in 2011; it made up a share of 72 per cent of the total expenditure on Agriculture and Rural Development.

This budget item came into existence in 1993 as the Council of Agricultural Ministers had decided in 1992 to reduce the intervention prices for grain by about 33 per cent and to also reduce the support price for oilseeds. It was a widely held agreement in 1992 that farmers should be fully compensated for the income loss incurred from the price cut. This item grew over time as institutional prices for other agricultural products had to be reduced due to international pressure. However, the income loss incurred by farmers due to these additional price cuts was only partly compensated by additional direct payments. Thus, the first group of farmers was treated better than the following groups.

Direct payments were originally justified with the compensation argument

Even if there was agreement that farmers had to be compensated, there was a widely held understanding that a) it was compensation for the income loss due to reduced institutional prices and b) the compensation had to be tapered off petered out over time. The importance of the development of market prices can be illustrated for the case of wheat. Figure 1 shows the development of intervention and market prices for wheat and the attributed direct payments. It is obvious that market prices did not decline as much as intervention prices; but the latter had been taken for the quantification of the income loss.

Moreover, market prices in recent years have even been higher than the prices prior to the price cut. Most likely, prices will stay above the former price level in the coming years . Moreover, independent of the development of market prices, direct payments cannot be justified anymore by the need of adjustment aid. That part of EU agriculture (the Old Member States) which suffered from price reduction has had nearly 20 years for adjustment and thus, sufficient time to adjust. It has to be noted that a large part of EU agriculture (the New Member States) has never been hit by a price cut. In contrast, farmers in the New Member States generally enjoyed a higher income due to EU membership for 10 New Member states in 2004 and the other two in 2007.

The original justification does not hold any more; a new rationale has been proposed by the Commission

One may wonder why the EU Commission, in spite of the evidence, still sticks to the continuation of direct payments. Official statements clearly convey that the Commission is trying to put forward a new justification. It is amazing that the budget request for expenditure based on the new justification is practically identical with the past actual expenditure. The Commission seems to know that exactly the same amo unt of money is needed even if used to serve different purposes.

The Commission proposes two payment parts:

a)    Basic income support through granting basic decoupled direct payments, providing a uniform level of obligatory support to all farmers in the Member States (or in a region) based on transferable entitlements that need to be activated by matching them with eligible agricultural land, plus fulfilment of cross-compliance requirements.
b)    A mandatory “greening” component to support environmental measures applicable across the whole of the EU territory.

It is stated: “The necessary adaptations of the direct payment system relate to the redistribution, redesign and better targeting of support, to add value and quality in spending. There is widespread agreement that the distribution of direct payments should be reviewed and made more understandable to the taxpayer. The criteria should be both economic, in order to fulfil the basic income function of direct payments, and environmental, so as to support for the provision of public goods.”

The statement clearly supports the suspicion that the change is not primarily based on a diagnosis of the present situation and on the identification of market or policy failure. Instead, it is trying to convince the taxpayer that the exact amount of money which has been used to serve one purpose has to be used to deal with another supposed problem. Nevertheless, the new concept pretends to be able to improve the targeting of support. In the following we limit the discussion to the rationale provided for basic payments.

The rationale of basic direct payments is in conflict with social support in the member countries

The Commission argues that the income of farmers is on average lower than the average income of other sectors (see Figures 2 and 3) and, hence, income support is needed. The taxpayer – even with little education in economics – may ask the following questions:

1. Is it the task of the EU to provide for income support of specific sectors?
2. Can the need for social support be based only on a comparison of average incomes?
3. Are there adequate data available for efficient policy measures?

Is it the task of the EU to provide for income support for specific sectors?

The Treaty of Rome and all the other following Treaties did not mention that the EU has to provide income support for farmers. The Treaties only state as the first two objectives: “The objectives of the common agricultural policy shall be:

a)    to increase agricultural productivity by promoting technical progress, the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour,
b)    thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture.”

It should be noted, that the EU has – according to the Treaty – first of all to contribute to higher agricultural productivity and second, the increase in productivity should ensure a fair standard of living ….The ranking of the objectives is pronounced by the word ‘thus’. Clearly, the Treaties do not mention that the EU should be in charge of securing a ‘basic income’ for farmers.

Indeed, it seems strange that the Community should be responsible for of securing a basic income for a specific sector in the member countries. A policy which aims at securing a minimum (basic) income is obviously part of social policy. But social policy is generally in the realm of the member countries and not of the EU. Nevertheless, the EU Commission is putting forward a recommendation to implement social measures at the EU level. This proposal is not in line with the principle of subsidiarity.

It should also be noted that the proposed payments will slow down structural change and an increase in productivity as compared to a situation without any payments. The marginal producers, i.e. those who are going out of production if revenue declines, will stay in production for longer, leading to inefficient use of resources. Disguised inefficient use of resources in the agricultural sector will continue.

Can the need for support be justified by a comparison of average incomes?

The individual member countries of the EU have established social security policies. These policies do not provide support for specific sectors, but for people who suffer from poverty. In general, applicants for social assistance have to provide information about their household income and, in addition, on the value of their property. Applicants who own property which can be sold are not considered poor.

The EU proposes a completely new criterion for social assistance. All farmers qualify for basic payments, independently of their income. As the payment is related to the area of land cultivated by the individual farmer, owners of large estates will be entitled to higher payments than farmers who cultivate smaller estates. Hence, basic payments increase disparities within the agricultural sector. It is absurd to justify the basic income payments by a comparison of average incomes of sectors and to even support farmers who are considered to be well off by the societies in the member countries.

The proposal for basic payments contradicts the proposal to align payments across the EU member countries

The proposed gradual alignment of direct payments across the EU member countries is even more questionable, based on the new justification of the direct payments. If these payments should provide a minimum income for farmers, as argued by the Commission, the amount of money transferred to farmers in the individual countries should differ, as overall income and social assistance differs across the countries. Therefore, basic income support contradicts the gradual alignment of basic payments across member countries.

Do we actually have information on total labour income of the farming population as compared to that of people working in other sectors of the economy?

The Commission presented information comparing average incomes in agriculture with average incomes in other sectors (see Figures 2 and 3). Such comparisons are highly misleading. First, we do not have exact information on agricultural labour income, as most farmers do not have to submit a tax declaration . We have on the EU level only information on agricultural value added, including the income of all factors of production, i.e. labour, capital and land. EUROSTAT calls the value added per work unit as labour income.

However, not all of total factor income accrues to farm households. Tenants may have to pay rents to non-farmers and farmers may have to pay interest to non-farmers. Calculating this income one may derive a low income for labour, but the farm household may be well-off due to income from capital and land employed outside the agricultural sector. Hence, the calculated income does not inform about the income of farmers and, thus, on the need for financial assistance from the point of view of society at large.

It has to be added that even accurate data on the income of farmers do not inform about the living standard of farmers as compared to the non-farming population. Farmers pay fewer taxes than non-farmers for the same amount of nominal income. Moreover, farmers generally own houses and do not have to pay rent. Finally, many of them own land and capital. Consequently, most farmers do not qualify for social security in their home country due to their income and due to the value of their property. What a strange situation: If the Commission’s proposal is accepted, persons who are not qualified for income support (social security) in their home country will be qualified to receive basic income support from the EU. Can that really be? Is that acceptable?

Do we have information on agricultural labour input?

Calculating income per Work Unit as done by EUROSTAT and accepted by the Commission to support their reasoning, raises some additional problems. EUROSTAT provides information on value added at factor cost and agricultural labour input. Labour input is measured in work units where part-time and seasonal labour is aggregated in full time equivalents .  Even if EUROSTAT had fairly accurate information on agricultural value added, it has no such accurate information on the actual labour force and on that part of the labour force which relies on income from agriculture only. It is known that the share of part-time farming is fairly high in some countries; hence, the information on labour income per person employed is highly misleading.

Take for example the case of a full-time off-farm worker who owns a small farm cultivated by his wife. He may have a high income, but she may have a low income, even if much above the opportunity costs part-time farmers which work with one third of their time on the farm. According to the methodology of EUROSTAT the income of the husband is neglected and the income generated by the wife is multiplied by one third. Consequently, according to this methodology the wife earns an income below that in other sectors. Obviously, the derived information does not inform on the living standard of the family. Needless to say, that this household would not qualify for social security in any of the EU member countries.

Moreover, it is misleading to compare average income if the variance of income in the sectors compared is very high as in agriculture. According to the Commission’s data, 20 per cent of farmers in the EU receive 80 per cent of the present direct payments. Obviously, internal disparity is very high. How can the Commission propose providing for a basic income support for all farmers if some – or even many – have an income which is much higher than the income of the average person in our societies? One should recall that these payments have to be financed by the ordinary taxpayer. The Commission stated that the policy should become more targeted than in the past. The new proposal leads to high conflicts with this objective.

Is the CAP too expensive?

The EU Commission answers this question clearly. ‘No, CAP expenditure on the EU level is only a small share of GDP. The CAP is the only supranationalised policy and the value generated for the money spent is high’ . Whether a policy is too costly or not depends, first of all, on how policy measures are targeted; the less targeted they are the less efficient they are. A policy is well targeted if it heals a market or policy failure more efficiently than any other policy measure.

If the original justification of a policy has become obsolete, a continuation of the same policy is too costly. It is a widely held agreement that a continuation of the present direct payments system cannot be justified with the original arguments. Hence, this policy is too costly. The new justification of changing direct income payments to basic direct income payments clearly shows that a) there is no justification of such a policy measure and b) the justification presented by the EU Commission is based on inadequate information. Is the European taxpayer really willing to pay the high salaries of Commission staff in exchange for such a dubious proposal?

Summing up

The EU Commission’s proposal to introduce changes in direct payments is based on the perception that a new rationale for these payments is needed. The new justification for direct payments proposed by the Commission is not convincing. This new instrument would not contribute to the officially stated agricultural objectives laid down in the Treaty of Rome and which have not been changed; just the opposite, the effects of the new payments would hold back growth in productivity which is the first objective mentioned in the Treaty.

The Commission justifies the proposed basic income payments with the need to secure a basic income. Hence, the instrument could be part of social policy. However, so far the individual member countries of the EU have been in charge of social policy. The introduction of the new instrument would not be in line with the principle of subsidiarity.

The new instrument would be in strong conflict with the principles of social policy in the member countries. Social policy is generally based on information about household income and also takes into account the value of the property. In contrast, the proposal aims at providing basic support to all farmers independently of their actual income and their wealth. As the transfer is proposed to be related to the area used by the individual farms, the transfer to well-off farmers would be higher than for farmers with little land endowment. Disparity in agriculture would be higher than without these transfers.

The new justification put forward by the Commission is based on a comparison of average labour income in agriculture with labour income in the overall economy or in other sectors. Such a comparison can hardly be accepted for justifying socially motivated transfers. Such a policy has to be based on information about household income. Moreover, there is no accurate information on labour income of farmers in the Member Sates

Moreover, the Commission does not have adequate information about the labour income of full-time farmers in the EU.

The conclusion is that the present Commission’s proposal cannot be accepted.

Picture at head of post © Copyright Nigel Mykura and licensed for reuse under this Creative Commons Licence.

In this post I examine the future for national envelopes and partial coupling in the light of the Commission’s draft regulation on direct payments after 2013. At issue is the extent to which the draft proposals expand the scope for coupled payments and national flexiblity more generally in the post-2013 period.

National envelopes sometimes refer to the overall ceiling on the funding for direct payments allocated to each Member State, but here I use it in the more specific sense to refer to the share of direct payments over which Member States have some discretion over how to make these payments. They have been contested since their introduction as part of the Agenda 2000 reform. On the one hand, proponents argue that they are a response to calls for greater subsidiarity because they give greater flexibility to Member States on how to allocate aid payments to help specific groups of farmers. For this reason, they have been viewed sceptically by other Member States which fear that they could lead to distortions of competition since they are implemented according to national criteria.

Article 69 in the 2003 reform

The 2003 reform allowed Member States to retain up to 10% of their previously coupled payment ceilings under Pillar 1 for specific supports to farming and quality production (Article 69 of Council Regulation (EC) No. 1782/2003). The additional payment had to be granted for specific types of farming which were important for the protection or enhancement of the environment or for improving the quality and marketing of agricultural products. Furthermore, the money had to be returned to the sectors from which it was withheld.

Seven Member States and one region chose to implement national envelopes under Article 69 – Finland, Greece, Italy, Portugal, Slovenia, Spain, Sweden and Scotland (UK) [see Commission summary here]. All Member States which implemented national envelopes used the measure to support the beef sector, with support for the arable and sugar sectors supported by four Member States each. Other sectors for which national envelopes were used included the sheep, dairy, tobacco, olive oil and cotton sectors, with Italy introducing a national envelope for energy crops in 2007.

Article 68 in the 2008 reform

In the 2008 Health Check, Article 69 (now renumbered as Article 68 of Regulation 73/2009) expanded the scope of national envelopes while keeping the overall 10% share of each Member State’s direct payments ceiling [IEEP has a good briefing on this]. Its purpose remains assistance to sectors or regions with particular difficulties but its use became more flexible. Member States can continue to use these payments for environmental measures or improving the quality and marketing of products or animal welfare. However, the money no longer had to be used in the same sector although this option was continued.

But in addition, the national envelope can now be used to help farmers producing milk, beef, goat and sheep meat and rice in disadvantaged regions or to support economically vulnerable types of farming. It can be used to top up entitlements in areas where land abandonment is a threat. It may also be used to support risk management measures such as contributions to crop and animal insurance premia and mutual funds for plant and animal diseases. Countries operating the Single Area Payment Scheme (SAPS) became eligible to use national envelopes for the first time. Moreover, Member States which made use of Article 69 of Regulation (EC) No 1782/2003 were given a transitional period in order to allow for a smooth transition to the new rules for specific support.

In order to comply with WTO Green Box conditions, support for potential trade-distorting measures under Article 68 is limited to 3.5% of national ceilings. This includes support for types of farming important for the protection of the environment, support to address specific disadvantages, and support for mutual funds.

Member States were given three opportunities to make use of Article 68 in that they could notify the Commission of their intentions in August 2009, August 2010 or August 2011. By comparing the Commission’s regular summaries of the implementation details it is clear that use of Article 68 has expanded over time. In the May 2011 summary, only Cyprus, Malta and Luxembourg appeared not to make use of Article 68 at all.

Partial coupling

The provisions for specific support in the national envelope articles should be seen in the context of the possibilities for continuing partial coupling under the Single Payment Scheme. In the 2003 Fischler reform, there was significant scope to retain partial coupling. For example, Member States could continue to couple 25% of arable payments and 40% for durum wheat (Article 66), 50% of payments to sheep and goats (Article 67), 100% suckler cow premium and 40% of slaughter premium or 100% slaughter premium or 75% of special male premium (Article 68). Some coupled payments for minor crops and processing aids also continued.

The 2008 Health Check integrated the partially coupled payments in the arable crops, olive oil and hops sectors into the Single Payment Scheme from 2010. Processing aids and most other coupled payments, including some specific payments in the beef sector, are integrated into the single payment scheme by 2012 at the latest. With the implementation of the Health Check agreement, the suckler cow and sheep and goat premia as well as payments for cotton will be the only formally coupled payments still allowed to remain in 2013.

The amounts available for coupled payments under the Health Check reform (either as partial coupled payments or under the specific support provisions in Article 68) are calculated annually by the Commission. The specified amounts for 2011 can be found here. The share of direct payments which are maintained coupled in 2011 is just under 7% (some minor payments for protein crops, nuts etc. but also cotton are not included). However, the percentages differ quite significantly across individual Member States, as shown in the diagram below.

Portugal, Belgium and Slovenia have the highest shares of coupled payments. For the old Member States, the main coupled payments are the suckler cow premia (Portugal, Belgium, Austria, France and Spain) while in the new Member States the main coupled payments relate to sugar and fruits and vegetables. Also of interest is the balance between residual coupled payments and specific supports introduced under Article 68. For countries to the right of the diagram, the main payments are those under Article 68. Overall, specific supports under Article 68 account for 2.6% of direct payments while residual coupled payments account for 4.0%.

Coupled payments under the Commission’s draft legislative proposal for direct payments post 2013

The main innovation around national envelopes in the draft Regulation is that Article 68 is replaced by a general provision to allow voluntary coupling where certain conditions are met. Member States can grant up to 5% of their national ceiling to sectors or regions where specific types of farming or specific agricultural sectors undergo certain difficulties and are particularly important for economic and/or social reasons. This proportion is increased automatically to 10% of their national ceiling for the new Member States or countries that have provided coupled support to suckler cows (Portugal, Belgium, Austria, France and Spain). If desired, these latter Member States can apply to the Commission to use an unrestricted proportion of their national ceiling for coupled payments provided they meet a series of conditions set out in the draft Regulation.

Furthermore, after 2016, all Member States can apply to increase the specified percentages (5% or 10%, respectively) that apply to them if they can show that an increase is necessary to meet these specified conditions. These conditions include:
- the necessity to sustain a certain level of specific production due to the lack of alternatives and to reduce the risk of production abandonment and the resulting social and/or environmental problems,
- the necessity to provide stable supply to the local processing industry, thus avoiding the negative social and economic consequence of any ensuing restructuring,
- the necessity to compensate disadvantages affecting farmers in a particular sector which are the consequence of continuing disturbances on the related market;
- where the existence of any other support available under the DP Regulation, the RD Regulation or any approved State aid scheme is deemed insufficient to meet the needs referred to in this Article.

As some of the existing coupled payments (sugar, fruits and vegetables) will lapse and be fully integrated into the decoupled payments scheme after 2012, these provisions would seem to give plenty of scope for Member States to maintain or even increase coupled payments after 2013. Particularly the inclusion of market disturbance as a justification for specific payments is a new departure, even if the scope of these measures is limited to maintaining the existing level of production but not increasing it.

On the other hand, Member States will lose the possibility to provide support to specific agricultural activities entailing agri-environment benefits under Pillar 1 (the current Article 68(1)(v)), while support for risk management schemes are also moved to Pillar 2. Whether any Member State will feel strong enough about these omissions to fight for their retention in Pillar 1 remains to be seen.

Emphasis on international competition as a justification for income support

I don’t see how our agriculture can, at the same time, be competitive in the international market and have higher level of standards than farmers in other parts of the world.

But if we don’t have this minimum support for income and compensatory payments, the risk is that a lot of farmers who can be competitive without the crosscompliance rules that we have in Europe but not in other parts of the world-who in normal situations can be competitive-will not be competitive.

Active farmers

Ciolos showed strong commitment to the concept of ‘active farmers’. He stated one minimum requirement clearly. When asked whether he would “expect some agricultural goods to be produced for someone to be defined as an active farmer?”, Mr. Ciolos responded ‘Yes. If not, we cannot talk about agriculture or the farmer.’ But otherwise, he provided little substance on how a practical definition could look like, and he admitted:

We can’t expect to have a common definition at European level. This is why now the objective of the Commission is to come with, let’s say, a negative definition-who is not an active farmer-and then the Member States will define who is an active farmer, taking into account the specific situation at national level.

Cap on direct income support

Mr. Ciolos supported the idea of a cap. But when asked whether there is ‘a danger that the larger farm holdings will simpler reorganise themselves into smaller holdings to get around any cap’, he did not offer much clarification:

Especially with big farms, I don’t think their objective is only to have a big amount of payments from public money. I don’t think that we will have a very important phenomenon of the splitting or separation of farms only to have payments. I think a farmer uses other logic when he decides on the structure of production and farms, and is thinking not only about having a level of direct payments.

Small farms

The idea is not to increase direct payments for small farms, but to make them simpler, and then to propose a lot of instruments-like training, investment and organisation of production groups-in order to integrate the small farms more into the market than at present.

We propose to generalise decoupled payments in all Europe and to maintain coupled payments only in some specific regions, for some specific products.

Financial allocation within the first pillar

Q: ‘How do you envisage money being shared between the two main elements of the new direct payments-that is, basic income support and the greening component?’

We are analysing several scenarios, but I think we can go up to maybe one third of the direct payments being linked to the production and delivery of public goods of greening.

Q: ‘Are you considering basing the payment for greening activities in Pillar 1 on objective criteria, such as the additional cost of delivery or the environmental benefit?’

I can see that this part of the greening payments is exactly the level of the production costs for a farm that decides to integrate this measure. The objective, in fact, for us is to use this part of the payments to incentivise a farmer to do more, not only to have a payment in exchange.

Further remarks

The oral evidence shows nicely the broadly practiced art of claiming, at the same time, that the CAP creates no distortions in the international economy (‘I don’t think that we can now say that we influence the level of prices in countries in the south.’) and that similar levels of payment are needed within the EU to avoid distortions (‘Here we can have a distortion in the market if categories of farms have different treatment.’).

Mr. Ciolos denied again that there is any conflict between supporting the delivery of public goods and the standard of living of farmers.

Of course, I don’t think there’s a contradiction between these two objectives, but it will depend on the resources that we have for the Common Agricultural Policy.

I don’t think that there is a tension in the CAP between ensuring good standards of living of farmers and the delivery of public goods if the first Pillar of direct payment is reformed

He furthermore repeated the idea that agriculture is more affected by governmental regulation than other sectors:

It’s the only sector, I think, in Europe that has to play an economic role and plays a part in the market but, at the same time, has to integrate a lot of rules imposed by society. The automotive industry, the textile industry and other industries do not integrate a lot of expectations from people in the way that agriculture does.

I am sure that a list of the costs of regulatory compliance in the automotive industry with all its safety requirements and environmental standards would be quite long. Also, remember the compliance challenge for the chemical industry under REACH. And all the emission standards that affect industrial production in the EU (and which do not apply to imports). And all the legislation on work safety, healthy working conditions, employee rights and job security that affect large companies much more than small farms.

A last point:

I also remind you that the discussion in Doha was not blocked because of the resistance of the European Union, but because of the resistance of the other partners

It’s true: the recent stalemates have not been directly provoked by the CAP. But weak and conservative signals on agriculture from the EU at the beginning of the Doha-Round did quite a bit in bogging negotiations down. With a clear and early commitment from the EU that substantial agricultural liberalization is on the negotiating table, the Doha negotiations might have take a different path.

You can download the transcript here. Please note: The transcript is not yet an approved formal record of these proceedings. Any public use of, or reference to, the contents should make clear that neither members nor witnesses have had the opportunity to correct the record.

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.

On 18 October, French Environment Minister Jean-Louis Borloo and Sustainable Development Minister Chantal Jouanno put their names to a 16-page reform proposal that would see France’s current annual €10 billion a year in CAP payments be divided between basic income payments with environmental compliance (€3 billion), farmland conservation contracts (€6 billion) and food chain and price safety nets (€1 billion). This would be a radical redistribution. Currently 90 per cent of CAP spending in France is in the form of direct aids and market measures, with only ten per cent spent on farmland conservation and rural development.

For more detail on the proposals see Valentin’s earlier blog post.

Naturally, the publication of such a radical proposal was met with howls of dismay from the Ministry of Agriculture and its sponsors, the mainstream farm unions. Barely a month previously, the Agriculture Ministry had put its name to an altogether different, more conservative joint position with the German Agriculture Ministry. In the struggle that ensued, the environment ministers were forced to back-pedal and remove the offending document, even though it was warmly received by other stakeholders.

Nothing on the internet can ever be erased and the document is still available on the links below. It remains to be seen just which version of the French government position will prevail as we head into the next stage of the negotiations. French President Nicolas Sarkozy is said to have joked that France has two commissioners in the current college: Dacian Ciolos (agriculture) and Michel Barnier (single market). With a government so divided, perhaps he’ll need them.

Hat Tip: www.pouruneautrepac.fr

Downloads:

Proposal

Accompanying letter from Environment Minister Jean-Louis Borloo

The money is allocated to several instruments (doing away with the traditional two-pillar structure):

* €3 billion for direct income support, available to all farmers in the EU at an equal level, without any historic base. National governments could have the possibility to top up these payments. A flexible component could be introduced to soften fluctuation in prices and regional yields. The eco-conditionality (respect of good agricultural and environmental conditions) shall be tightened.
* €4 billion for environmental services, notably the protection of the climate, biodiversity and water. One part of these payments is available to all preferable farming systems (organic, high nature value, leguminous plants, foraging, low input). Another part is limited to special areas (less advantaged areas, Natura 2000 etc).
* €2 billion to boost the transition towards more sustainable farming. This covers the conversion to preferable farming systems, green investments, innovation and collective responses to local challenges.
* €0.5 billion for food policy. The objective is to promote high-quality, responsible and local consumption through labeling, consumer education, food stamps and investments, for instance in local markets.
* €0.5 billion for security nets and market intervention. Interestingly, the Ministry warns against blanket subsidies for insurances as this can push farmers towards high-risk, high-intensity farming. Only insurances that reward sound environment stewardship should be subsidized.

The Ministry also recalls the polluter pays principle and proposes to consider taxes on the harmful aspects of farming.

There are some elements that raise concern. One is the continuation of fully EU-financed direct payments. However, the proposed drastic cuts to the direct payments combined with stricter eco-conditionality make this tolerable. Another problematic point is the idea to move away from co-financing of agri-environmental measures towards full EU-financing. Furthermore, one phrase about renewed Community preferences (reduced market access for foreign farmers in French parlance) may raise concern (though it may also be discarded as conforming to French political correctness).

The actual proposals are incompatible with French claims to €10 billion: an EU flat-rate income support would bind most CAP money in member states that currently have low CAP entitlements, leaving little for the environmental objectives. And it would be difficult to justify why environmental payments in France – fully EU-financed as they supposedly serve European public goods – grossly exceed payments in other member states.

Despite some minor flaws and tactical compromises, this is a great document. It is amazingly out of line with the position established by the French Ministry of agriculture and espoused in the Franco-German position paper. Let us hope that other ministries of the environment have the same guts! Why not a Franco-German paper for a green CAP? Or even a joint declaration by 27 ministries of the environment?

The position paper can be downloaded in French here.

The declaration states:

The need for ambitious CAP reform: The Common Agricultural Policy (CAP) fails to adequately fulfill important societal objectives: to enhance biodiversity and climate protection, improve water quality, preserve scenic landscapes, increase animal welfare, promote innovative, efficient farming and fair competition in the internal market, and avoid harming farmers abroad. The debate on the future of the CAP beyond 2013 presents the opportunity to significantly improve this policy.

Broad agreement among experts: The shortcomings of the current CAP and recommendations for more effective agricultural policies have been substantiated in numerous scientific publications. A group of leading agricultural economists from across Europe has issued a declaration on ‘A Common Agricultural Policy for European Public Goods’. National advisory bodies, such as the Scientific Advisory Council of the Federal Ministry of Food, Agriculture and Consumer Protection in Germany and the Social and Economic Council in the Netherlands, have also called for far-reaching changes.

Policy-makers’ status quo bias: Unfortunately, decision-makers in agricultural policy appear unwilling to seize the opportunity for substantive reform. Their proposals intend to maintain the status quo to a large extent. A critical lack of reform ambition is manifest in the ‘Franco German position for a strong Common Agricultural Policy beyond 2013’, in the own-initiative ‘Report on the future of the Common Agricultural Policy after 2013’ by the European Parliament, and in the leaked Communication by DG Agriculture on ‘The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future’, among others.

Guiding principles for a new CAP: We call on policy-makers to pay less attention to special interests. For a future CAP that better serves the public interest, we recommend five guiding principles.

• Targeting on public goods: All subsidies should be closely linked to the provision of public goods. Any subsidy that is not differentiated according to farmers’ provision of public goods, such as the Single Farm Payment, should be progressively phased out. The alleviation of rural poverty should be a function of social and not agricultural policy.
• Environmental focus: Sustainable land use should become the key objective of the CAP. This includes biodiversity protection, climate change mitigation and responsible water management.
• Market orientation: Generally, well-functioning markets rather than state intervention are the best way to attain a demand-oriented, innovative and competitive farm sector. Great care should be taken that subsidies distort production and prices as little as possible. Export subsidies should be abolished.
• Global food security: The EU should promote global food security through an open trading system, support for agricultural productivity in developing countries, climate change mitigation and the preservation of its own sustainable production capacity. To enhance productivity, more public investment in research and development should be undertaken.
• Subsidiarity: The CAP should focus on objectives and policy instruments for which EU-wide coordination creates the greatest value added. It should be carefully examined where burden sharing between the member states and the EU, instead of full EU-financing, can be extended.

Policy-makers must show more reform ambition for the post-2013 CAP if they are serious about the Europe 2020 strategy and the EU’s high-level environmental commitments.

Here you can sign the declaration and see the list of signatories.

As part of the December 2005 heads of government agreement on the 2007-2013 financial perspective it was agreed that there would be a midterm ‘budget review’ in 2008-09 which would look at all areas of the EU budget. including the two hottest political potatoes – the large share of funds going to the CAP and the British budget rebate. The review began with a big public consultation led by the then Budget Commissioner Dalia Grybauskaite, who pulled no punches in describing the budget as largely out of tune with Europe’s current and future challenges. However, she left the Commission early to become President of Lithuania and with delays to the Lisbon Treaty ratification the review process slowed to a standstill.

The future of the budget hit the headlines late last year with the leaking of an early draft of the Commission’s communication on the future of the budget. This suggested share going to the CAP and Europe’s regional policy needed scaling back to free resources for innovation, energy security, climate change and jobs. The document, which is understood to have been drafted by Commission President Barroso’s close advisers, was immediately disowned by a handful of outgoing Commissioners who saw it as a threat to their own budget lines.

We now learn that the Commission’s revised communication will be published in the first week of October (expect leaks before that). Budget Commissioner Janusz Lewandowski is said to favour “evolution over revolution” and in an interview with the German newspaper Handelsblatt the Commissioner suggested a reduction in the CAP budget. This week his officials have suggested the CAP budget could decline to around 33 per cent of the total (down from the current 40 per cent). MEPs with close links to farming lobbies are already raising the alarm. Irish MEP Mairead McGuinness said

“The Budget Commissioner sees a future with less spent on agriculture and more on research and innovation. His words are part of a softening up process, preparing the ground for a lower agriculture budget”

Yet Lewandowski is clearly taking a more cautious approach than previous Commissions. A decade ago the Prodi Commission suggested the CAP budget be cut to 30 per cent of the total EU budget. Prodi was eventually outmaneuvered by his own Agriculture Commissioner Franz Fischler and the CAP budget has increased each year since then with the bulk of it being ring-fenced up to 2013 under the terms of a deal made by French and German heads of government back in 2002.

Meanwhile, current Commission President Barroso, in his first ‘State of the Union’ address, steered clear of saying anything concrete on the future of the CAP that might frighten the horses. He called for “an open debate without taboos”, argued that the EU budget should be directed “where it leverages growth & delivers on our European agenda” and said that farm policy should contribute towards achieving global food security and the sustainable management of natural resources and reversing biodiversity loss.

One issue that looms large over the CAP is the possible extension of national co-financing, which applies to every other part of the EU budget, to CAP farm subsidies. This would help countries that are net contributors to the budget and might free up resources within the EU budget for other areas. It’s a move that seems to have been accepted by influential parliamentarians like Paolo De Castro MEP, chairman of the Agriculture Committee and is thought to be favoured by the French government.

In a possible sign of things to come in relation to co-financing, the Czech Republic government has decided that it will no longer make voluntary nationally-financed contributions to top-up CAP direct payments to Czech farmers and landowners. These optional payments have been taken up by all of the new member states during a transition period in which the EU funded contribution covers only a share of the total payments that can be made. The amounts involved have been substantial. In 2010, for example, the Czech government had topped up EU farm subsidy payments by €271 million. In the same year Poland topped up its farm subsidy payments by €1.1 billion, Hungary by €529 million and Bulgaria by €267 million.

There can be no doubt that if the CAP sees more national co-responsibility the idea of farm subsidies as ‘free money from Brussels’ will fade. Co-financing will focus minds in national finance ministries on whether voters would scarce national public funds should be spent on farm subsidies while cuts are being made in other areas like health, education, defence and housing.

According to the scientific advisory board on agriculture, market price, direct income and farm-level investment support should be removed. There is no reason to fear a massive breakdown in EU agriculture: 61% of German agricultural area is rented out, so that large share of direct payments does not benefit farming anyway; bioenergy makes it increasingly attractive to continue farming; structural change will allow significant cost reductions to make farming more competitive; several agricultural sub-sectors are economically viable, and have been so for a long time, without receiving significant subsidies and tariff protection; the extra costs of higher EU standards are low for most farms (less than €50/ha); and targeted payments to maintain agriculture in areas threatened by undesirable land abandonment can compensate adverse effects.

Coping with fluctuating market prices will be a key entrepreneurial challenge for farmers – and not a cause for government intervention. Governments may have some role to play to address production risks that cannot be efficiently insured – especially with regard to droughts. However, adaptation to climate change falls again primarily into farmers’ responsibility, while governments should limit their activity to providing public goods (such as meteorological forecasts, research and innovation).

A sectoral approach tied to agriculture is not a suitable mechanism for regional development. Furthermore, responsibility for regional development should be shifted to lower levels of governance.

Significantly more funds should be dedicated to targeted public-goods programs. In addition to the traditional objectives of climate change and wildlife biodiversity, the importance of maintaining the diversity of the agricultural genetic pool is highlighted. It should be examined which of these public-goods policies are best integrated into the agricultural resort and which should be transferred to other ministries.

This is a world apart from the official German position, dated March 31, 2010, and agreed by the federal and Länder ministries. The ministries favor the status quo plus some more Health-Check style modifications. The two-pillar system with a strong first pillar, centered on direct income support, should be maintained. The CAP should be further simplified and remaining market interventions be reduced to a safety net. Socio-economic objectives should remain central. And the current distribution of subsidies across member states should be upheld.

When will these two worlds clash? So far, the Ministry of Economy (liberal, FDP) and the Finance Ministry (conservative, CDU) have been silent on CAP reform and left the issue largely to the Ministry of Food, Agriculture and Consumer Protection (Bavarian conservatives, CSU). But the strain of the financial and economic crisis on public budgets – together with the growing public discontentment with Germany’s responsibility to pay for the EU and other member states’ deficits – makes a showdown inevitable.