In the first of a series of video conversations with leading figures in the debate over the future of the CAP, Jack Thurston talks to Paolo De Castro MEP, chair of the parliament’s Committee on Agriculture and Rural Development and a former two-term Italian agriculture minister and professor of agricultural economics.

De Castro explains that he has always regarded himself as a CAP reformer and sets out his vision for a reshaping of the EU’s farm subsidy system. He advocates a shift to a basic flat rate aid payment to farmers, plus additional funds to be allocated at the discretion of member states. He argues for introducing minimum and maximum thresholds for payments (a minimum around 300 euro and a maximum in the range 400,000-500,000 euro). He speaks in favour of co-financing of the CAP, so long as it’s not optional for member states. He explains his vision for the European Parliament’s role under the new Lisbon Treaty rules, including his idea of a permanent seat for the Agriculture Committee on the Agriculture Council and how he’d like COMAGRI to take part in CAP comitology.

CAP Reform Conversations: Paolo De Castro MEP from farmsubsidy.org on Vimeo.

The German Council for Sustainable Development has just published a report highlighting the environmental damage caused by intensive agriculture and calling for a reform of the CAP direct payments system. It proposes a three-fold structure of payments: an environmental basic payment, a series of targeted agri-environmental payments for farmers who accept higher obligations, and a series of payments for high nature-value areas where the continuation of agricultural production is desirable but threatened on economic grounds.

For the environmental basic payment, it suggests that eligibility would be conditional on farmers turning over at least 10% of their area to environmentally-friendly husbandry with a view to maintaining a high level of biodiversity in the agricultural landscape throughout the EU.

The Council explicitly argues against the idea that farmers should be remunerated for fulfilling their statutory obligations with respect to the environment, animal welfare and food safety (cross compliance). It also justifies full EU financing of most of the payments “so long as these are directed to fulfilling EU objectives”, thus apparently advocating that some of the existing co-financed agri-environmental payments in Pillar 2 might be moved to Pillar 1 at least as far as financing modalities are concerned.

The report provides an excellent summary of the state of the debate on the environmental implications of agricultural policy (in German only, at least for the moment).

Read it here. Google Translate renders a passable English version of the press release for non-German speakers here.

The president of the main farmers’ union, the Fedération Nationale des Syndicats d’Exploitants Agricoles (FNSEA) Jean Michel Le Metayer called for “a pause in agri-environmental measures” and the suspension of new measures. For French speaking readers, the (short) video is here.

The Ministry of agriculture seems sympathetic with this position, even though Nicolas Sarkozy has recently positioned himself as greener than his predecessors, with initiatives under a framework law called the “Grenelle of the environment” and a carbon tax (it turns out that farmers should be exempted from paying this tax, eventually). The French minister Bruno Le Maire apparently said a few days after that, indeed, a revision of the agri-environmental measures (AEM) was necessary and that it should start with an inventory of the provisions adopted throughout the Union according to the newspaper Le Figaro. On January 13 Le Maire unveiled a proposal for a new agricultural law to be discussed by the Parliament with little apparent concern for the protection of the environment.

The idea of suspending agri-environmental measures is bizarre, given that they are voluntary measures that are highly appreciated by farmers in some regions, providing often a third or more of the farm incomes in mountainous regions for example. So what did the FNSEA president actually mean? After some inquiry, it seems that he actually used the term “agri-environmental measures” for CAP jargon ignorant journalists. He was not in fact targeting the AEMs, i.e. second pillar measures, but rather the GAECs (Good Agri-Environmental Conditions, i.e. a set of technical constraints that farmers needed to respect in order to receive the Single Farm Payments, under Pillar 1, part of what is sometimes known as cross-compliance), as well as “any element of regulation that imposes environmental constraints such as the Nitrate Directive, or national measures under the new Grenelle law framewok” (FNSEA sources). Le Metayer argued in the interview that because of low prices and low incomes, farmers could not afford the ever growing stream of environmental regulations.

To FNSEA’s defense, some of the constraints imposed in 2009 turned out to be ill-designed in some regions. For example, farmers had to plant intermediate crops between harvests so as to keep soil covered and reduce nitrate leaching. In some areas, the lack of rain when these crops were planted resulted in extra costs without any environmental benefit. However, the FNSEA position sends an awkward signal regarding farmers’ image in the public opinion, while water pollution with nitrates makes headlines every summer. More worryingly, Le Metayer’s demand shows how much the the anti-environmental stance is widespread among the mainstream French farm lobby (another farmer’s union, the Coordination Rurale runs perhaps an even more anti-environmental program than the FNSEA). The FNSEA is highly representative and about to win again a majority in one of the main instances that co-manage the agricultural sector with the government in France. Only a minority of farmers belonging to the left wing Conféderation Paysanne seems in favour of a greener CAP, but their position regarding market regulation makes them hardly credible in the European debate (they favour a system of generalized quotas and a complex set of coupled payments restricted to small farms). A fringe of enlightened entrepreneurial farmers, the Société des Agriculteurs de France is open to produce public goods as much as wheat if the CAP pays them for that, but this is more a think tank than a powerful union.

It is hard to make predictions regarding the future behaviour of France as far as the coming debate on the CAP is concerned. With France becoming a net contributor to the CAP, the unholy alliance between the ministry and agriculture and the ministry of finance to defend large CAP budget is about to end. The former minister, Michel Barnier, used Health Check flexibility to reallocate 1.4 billion euro of Single Farm Payments towards the extensive grass-fed livestock sector. This has turned the powerful cereal producers against the government. Given that farm incomes have decreased much more than the EU average in 2009, the Ministry of agriculture can hardly afford more radicalization of the farmers, and his apparent scorn for environmental causes is perhaps tactic. However the historical aversion of the FNSEA for the environment has been particularly effective in the past. France will certainly resist any greening of the CAP in the future.

Britain’s National Farmers’ Union is noted for its strategic, long-term view of agricultural issues. Its officials have a sophsiticated, well informed view of developments and it was therefore interesting to read an interview in the latest edition of Farmers Weekly with the NFU’s head of economics and international affairs, Tom Hind. He was at one time acting head of the NFU’s office in Brussels.

Not surprisingly, he takes the NFU line that farmers need to continue to receive the single farm payment (SFP) to give them a degree of income stability, especially faced with volatile markets. A basic tenet of agricultural economics is that markets for farm commodities are relatively unstable: to put it at its simplest, even with modern agronomy, the weather remains a factor which can disrupt such markets. If one accepts the view that farmers as a category require market stabilisation measures (which is not quite the same thing as income stabilisation), there is still room for a debate about whether the SFP is a particularly efficient or fair policy instrument, but it could be argued that we have to work with what we have.

In any event, he is confident that the long-term legitimacy of direct payments will be strengthened during the upcoming debate about the future of the CAP. He is emphatic that decision-makers in the UK ‘must move away from ideologically entrenched positions, especially on phasing-out direct payments.’ Not surprisingly, he is heartened by the declaration made by 22 EU governments in Paris in favour of a strong CAP. It’s a document short on specifics, but it really represents a political commitment, rather than a set of policy recommendations.

It is interesting that he does fear some further renationalisation of the CAP which many member states pushed during the health check. He notes that in recent weeks several governments have resorted to state aids to give support to their farmers. He is correct to point out that such activities can lead to competitive distortions between member states and hence undermine the single market. What particularly concerns him is the possibility of national co-financing of direct aids. With justification, he fears that UK farmers would lost out as the Treasury would not be keen to top up direct support.

He does oppose direct payment schemes that used farm size or turnover for determining levels of support. He says that such criteria are ‘woolly’ and they are certainly difficult to interpret and apply in practice given the legal and other issues surrounding what constitutes ‘a farm’. However, the real objection is that Britain is one of the countries that would lose out. If one is going to have farm subsidies, and one wants European agriculture to be competitive, should they be denied to the farmers best placed to compete on international markets?

Where I have particular sympathy with him is when he says that what is wanted is a policy focused on the market. This does not mean just decoupling, but also correcting market failures such as excessive retail power. Whether the EU can do much about this is another question. In large part it falls within the competition policy remit of member state governments, but they are often reluctant to rein in retailers who keep down inflation by delivering cheap food to voters, albeit by usually contractual and other tactics that are arguably unfair and not in the long-run interests of an efficient and effective food chain.

Clearly someone like Tom Hind is looking at these issues with the needs of his members in mind: that is what he is paid to do. Most of us wouldn’t start from where we are and a sudden withdrawal of subsidies could have substantial negative impacts on the agricultural economy.

Nevertheless, modern farmers are much more market oriented and are aware that they have to deliver products that the consumers want: hence the proliferation of farm shops and small-scale processing businesses serving niche markets with value added products. Hopefully, they can eventually be weaned off subsidies, particularly if competition policy is used to remove unfair practices.

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,

Over at the excellent farmpolicy.com Roger Waite, editor of Agra Facts, has posted a thorough account of the appointment of the new EU Agriculture Commissioner Dacian Ciolos. He says that while Romania had sought the powerful position, it was really a case of appointment by default:

I tend to feel that Barroso was left with no other option, as no one was willing to put forward a good candidate – and that he was the only suitable candidate from among the nominees.

[...]

Five leading European farming and environmental NGOs, who between them boast several million members, have jointly published a blueprint for a new Common Agricultural Policy. In an unusual and very modern step, they have published a draft proposal and opened it for consultation. They will produce a final version in 2010. The proposal, which runs to 28 pages, is for a radical reorientation of the CAP away from a productivist and income support model towards a ‘public money for public goods’ ethos. [...]

The Lisbon Treaty has been ratified and among it’s political innovations is a “citizens’ petitions” tool. Article 8B says that

“Not less than one million citizens who are nationals of a significant number of Member States may take the initiative of inviting the European Commission, within the framework of its powers, to submit any appropriate proposal on matters where citizens consider that a legal act of the Union is required for the purpose of implementing the Treaties.”

[...]

The debate on the future of the CAP after 2013 has now started following the informal Farm Council in the Czech Republic earlier this month. Those who want to influence the debate have about twelve months before the Commission publishes a Communication (effectively a White Paper) on future policy in the summer/early autumn of next year. Formal legislative proposals will then be published in the middle of 2011 together with the proposals for the financial perspectives from 2014 to 2019 or 2020. [...]

Three of my Irish colleagues at the Teagasc Rural Economy Research Centre have conducted an interesting simulation to estimate the extent to which farmers treat the Single Farm Payment (SFP) as coupled or decoupled. Using the EU-wide partial equilibrium simulation model AGMEMOD, Peter Howley, Kevin Hanrahan and Trevor Donnellan project Irish production in the cattle and cereals sectors (these were the sectors with the most important payments in the pre-SFP era before 2005) under two assumptions: first, that farmers treat the SFP as fully coupled, and second, that they treat the payment as fully decoupled.

They then compare the levels of production that are projected under the alternative assumptions of full and zero coupling with actual observed output values in Ireland over the period 2005-08. Based on this experiment, they conclude that farm operators to a large extent treat these payments as fully coupled, but that the supply-inducing effect is smaller than for the previously coupled payments. [...]

The Czech Minister for Agriculture has issued a press release summarising the discussion at the informal agricultural council in Brno today. The subject was the future shape of a simplified system of direct payments and a more even distribution that would result in a fairer competitive environment on the single market. Even allowing for translation issues and the usual blandness of official press releases, this is a particularly opaque example of the genre.

According to the release, the Ministers brought agreement on the issue of the importance of direct payments as well as creation of a new Common Agricultural Policy after 2013. The Ministers further committed to address the issue of unequal levels of payments to EU Member States. The reference to a new Common Agricultural Policy after 2013 creates interesting possibilities if indeed this is what is meant. [...]

One of the many drawbacks of the CAP is that it costs a lot of money to run which reduces the sums that reach the supposed beneficiaries. It has now emerged in response to a parliamentary question that each claim for the Single Farm Payment (SFP), irrespective of its value costs £742 to process. Junior Defra minister Jane Kennedy said that the figure was obtained by considering the direct processing costs and the total number of claims received. [...]

You will be forgiven for wondering why things have been a little on the quiet side here at CAPHealthCheck.eu over the past couple of months. For my part, besides some intensive behind-the-scenes work at farmsubsidy.org and and exciting new EU budget transparency project that’s still under wraps, I’ve been blogging more on the EU budget than on the CAP, mostly over at FollowTheMoney.eu. Among the other leading contributors to this website, Wyn Grant has been on a fact-finding visit to Australia and Alan Matthews has been attending to his teaching responsibilities as well as working away on his forthcoming magnum opus on the CAP and global development. Fear not, we will be back in the saddle soon enough, but while things are running at a little below full capacity, you might want to take a look over at an excellent new website/blog called CAP2020: Debating the future of the Common Agricultural Policy. [...]

Last week I posted five reasons why it is hard to justify spending 30 billion euros each year on the Single Payment Scheme. Here are five more reasons. [...]

The EU spends around 30 billion euros each year on the single payment scheme, by far the largest of the myriad schemes and programmes that together comprise the 54 billion euro budget of the Common Agriculture Policy. The scheme was first introduced in 2005 but it is hard to see it surviving in its current form beyond the end of the EU’s 2007-13 financial perspective. Here are five reasons why the single payment scheme is not politically sustainable. Five more will follow tomorrow. [...]