What might be the production, consumption and trade effects of the Commission’s proposals to redistribute direct payments by moving to a flat(ter) structure of direct payments across the Member States, and to redistribute payments within Member States by moving from the historic basis of farm payments (in the majority of Member States which operate this system) to a regional flat rate system?

A silly question, some might respond, for are not the EU’s direct payments decoupled (leaving aside the continued existence of a share of coupled payments) and thus not meant to have an effect on farm production? If a direct payment is truly decoupled, then moving payments from one farm to another, or from one country to another, will affect relative incomes but not output.

But there is widespread agreement that even decoupled direct payments do have an effect on production, even if there is less agreement on how strong this effect is in practice. There are now a number of studies which attempt to quantify these effects.

These include the yet-to-be-released Commission draft impact assessment of changes to the direct payments regime, as well as studies using the CAPRI and AGMEMOD models. The general message from these studies is that the production (and thus trade) effects are likely to be small, but that the distributional effects across and within countries could be significant.

Commission AIDS7K model

One approach is illustrated by the Commission’s farm income impact modelling using its AIDS7K model based on FADN data. Because this is a static model with no behavioural structure, it cannot directly calculate possible changes in the structure of production.

However, the Commission reports possible income changes by farm type. If the assumption is made that higher incomes on some farm types will be associated with increased production, and vice versa, then some inferences can be made on the likely direction of production changes.

As a general rule, a uniform flat rate would reduce support in more productive regions and sectors in favour of more marginal regions. In any move towards a flat-rate payment either between or within Member States, grazing livestock (beef and sheep) farms are the main beneficiaries (along with wine and horticultural farms). According to the Commission, moving to a uniform flat rate per hectare of potentially eligible area (PEA) across the EU as a whole (note that in the scenario it models farmers in several Member States continue to receive a limited amount of coupled direct payments (suckler cows, sheep and goat, cotton, Article 68, Posei)) would see farm net value added per Agricultural Work Unit increase by 10% on beef and sheep farms. Farm net value added would fall marginally on milk and arable farms.

(If account were taken of the greening component in Pillar 1, which means farmers must incur additional costs to become eligible for the payment, then the income gain to grazing livestock is reduced and the income losses on milk and arable farms but also pig and poultry farms are exacerbated).

AGMEMOD study

These production effects are more formally modelled in two well-known sector models AGMEMOD and CAPRI. In each case the results are, in part, determined by the modellers’ assumptions about how direct payments impact on production as well as by the policy scenarios that they assume.

The AGMEMOD 2020 combined model is an econometric, dynamic and partial equilibrium model representing each of the 27 Member States. Direct payments are incorporated as add-ons to the relevant producer price to form a reaction price (livestock, livestock products) or expected gross returns (crops).

Coefficients are applied to these add-ons to determine their production effect. For example, a coefficient of 1 would imply that farmers perceive direct payments as equivalent to a similar price increase, while a coefficient of 0 would imply that they treat them as totally decoupled.

The coefficients used in AGMEMOD vary across countries and commodities, for example, to reflect differences between the historic and regional SPS systems. For historical payments the coefficients vary between 0.3 and 0.6 and for regional payments between 0.1 and 0.5. The coefficients for coupled payments lie between 0.5 and 1.0.

Results of moving to a uniform flat-rate payment across the EU as a whole are reported in a recently-published AGMEMOD simulation [access to ScienceDirect required] for wheat, barley, maize, beef, pork and milk. Unfortunately, the consequences of moving to a uniform EU flat-rate payment are conflated with an overall reduction in the CAP budget for direct payments (by around 54% in the final year of implementation). Another important difference with the Commission analysis is that coupled payments are assumed to be decoupled in this analysis, which has particular consequences for the beef results. Despite these more severe assumptions, the production effects are estimated to be very marginal (ranging from 0% to -0.8% of commodity production in 2020) apart from beef where production is estimated to fall by -3.3%.

The AGMEMOD study does not report the expected commodity market price changes although these are presumably correspondingly small. AGMEMOD assumes exogenous world prices which are not affected by the EU net trade balance. To the extent that world prices respond to a reduction in EU production, then the AGMEMOD results, small as they are, also represent upper-bound estimates.

CAPRI study

A second study published by the EU’s Joint Research Centre uses the partial equilibrium CAPRI model together with a specially tailored farm group component called CAPRI farm type (CAPRI FT) to analyse the impact of a flat rate for direct payments at NUTS 1, MS and EU levels (with the level of redistribution and potential impacts increasing in moving to an EU flat rate). The farm models are behavioural programming models in which production and land use (but not farm structure) change in response to changes in relative profitability of different enterprises.

In the CAPRI model direct payments have an impact on production through their partial capitalisation in the returns to land. As direct payments change, so does the cost of land. Thus a reduction in direct payments will favour land-intensive production and vice versa. Land has an elastic supply curve in the model and, at the margin, is in competition with non-agricultural uses such as forest, recreation or nature reserve. So if direct payments fall sufficiently, land moves out of agricultural production and overall production will fall.

The study assumes that if land moves out of production the equivalent direct payment is lost and so overall expenditure on direct payments falls slightly in the scenarios modelled. The scenarios also assume that payments which are coupled in the baseline are decoupled in the scenarios, which will particularly affect beef and sheep as noted earlier.

This study also shows relatively small production and price impacts. In the EU flat rate scenario, which represents the most radical redistribution of direct payments, production generally falls (by -1.3% and -1.9% for cereals, by -1.7% and -0.8% for oilseeds, and by -0.6% and -0.2% for meat in the EU-15 and EU-10 respectively). The maximum price increase was for cereals of 1.5% for the EU-15 and 2.9% for the EU-10, while for meats prices are projected to increase by 1.1% in the EU-15 and 1.2% in the EU-10. The small magnitude of the impacts is due in part to the role of entitlements in limiting land use expansion while allowing for some substitution between grassland and arable land.

Given the small price and production changes, income effects are mainly driven by the redistribution of decoupled payments and to a lesser extent by land use changes. As regards farm types, large and medium size farms and dairies, mixed crops and livestock, general field and mixed cropping, olives, cereals and oilseeds and permanent crops are particularly negatively affected. Small farms tend to be less affected. On the other hand, the most extensive production systems, such as sheep, goats and grazing, the residual farm category and mixed livestock farms, realized higher premiums and incomes. These income changes correspond closely to those projected in the Commission’s AIDS47 model. They are aggregate changes, and there can also be redistribution within farm type groups with some farms gaining income and others losing. These distributional effects are analysed in detail in the study.

Conclusion

The Commission’s 2013 legislative proposals to be released next month will contain a number of measures likely to affect the level of EU domestic production and thus the impact of EU agricultural policy on third countries. The most significant will be the market measures confirming the elimination of milk and sugar quotas. But changes in the design of direct payments, including the overall budget for these payments, redistribution across farmers and member states, the introduction of the greening component, and the extent to which payments can be coupled or not, can also potentially have market effects.

Redistribution of direct payments (moving from the historic payment for entitlement payments to a regional flat-rate system in the EU-15 Member States plus Malta and Slovenia, and moving to greater convergence in the value of payment entitlements across Member States) will tend to shift payments from more productive to less productive Member States, and from more intensive to less intensive farms within Member States.

Redistribution of payments on its own would thus be expected to have a negative effect on EU production. Recent studies support this intuition but suggest that the effects will be very marginal, in most cases less than 1-2%. The effects are somewhat larger for cereals than for livestock but still rather small. Overall, therefore, the studies support the view that the EU’s direct payments are rather decoupled in practice.

One of the more significant changes proposed by the Commission in its draft legislative proposal on direct payments is to eliminate those existing entitlements to support which farmers have built up in the past. The basic payment scheme will replace the Single Payment Scheme and the Single Area Payment Scheme as from 2014. The new scheme will operate on the basis of payment entitlements allocated at national or regional level to all farmers according to their eligible hectares in the first year of application.

The proposal to allocate new entitlements on the basis of land farmed in 2014 has provoked a massive protest in Ireland (see, for example, this Irish Examiner story). It is alleged that, in an attempt to build up their claim to entitlements in 2014, farmers are taking back land which is currently leased out, thus creating massive disruption in the land rental market and discriminating against those farmers who are actively farming the land.

It might seem hard to understand why a farmer who had decided to rent out land and thus exit farming himself would now wish to re-enter farming (given that to retain the entitlement the landowner must continue farming in the future). One reason might be that land rents failed to fully reflect the value of the single farm payment, at least in Ireland.

For example, in the Irish Examiner story quoted above, the farmer leasing land was paying on average €100 per acre or €240 per hectare. Because the value of entitlements is based on historic payments in Ireland, the exact value of the single payment on those leased hectares cannot be known with certainty. However, on average the value of an entitlement in Ireland is around €270 per hectare of eligible area. So this suggests that existing land rents might not fully capture the value of the entitlement payment, although it must also be remembered that the entitlement holder also must bear the cross-compliance costs. In the case of the farmer in the Irish Examiner story, it seems that he was outbid by another farmer prepared to offer a higher rent.

Whether driven by rational considerations or simply fuelled by uncertainty about how the new system might work in practice, there is at least anecdotal evidence that the choice of 2014 as the new base year is proving disruptive. The Irish Minister for Agriculture Simon Coveney is quoted as calling it “nonsensical” and there is a high-powered lobbying effort underway to link the entitlements in some way to 2011 when the Commission’s proposals are published on 12 October next.

One potential solution floated in the Irish farming press this week was a proposal that, to qualify for payments in 2014, an applicant must have received some payment in 2011. This might mitigate but it would not eliminate pressures to get hold of land before 2014. More significantly, it would retain the link to the historic basis of payments which it is the Commission’s intention to remove.

The Irish Minister claims support from other countries in his lobbying efforts, but it would be interesting to know if these fears of a ‘land grab’ between now and 2014 are shared in other Member States.

The Commission’s proposals for the design of direct payments after 2013 include a greening component which, according to the draft legislative proposal (yet to be released on 12 October next and thus subject to change) will be mandatory for farmers in receipt of the basic income payment – thus becoming what I called in an earlier post a form of super-cross-conditionality.

In the impact assessment to be released with the legislative proposal the Commission has made some estimates of the cost of implementing these green measures. In this post, I examine these costs using information in the draft version of the impact assessment (Annex 12 Impact of Scenarios on the Distribution of Direct Payments and Farm Income).

This version was completed before June 2011 and the favoured proposal in the draft regulation now differs somewhat from the version examined in June. In particular, the obligation to maintain a green cover during winter has been dropped, but on the other hand the area to be setaside under the ecological focus requirement has been increased from 5% to 7% (see this post for a summary of the draft direct payments regulation).

The effect on farm income in 2020 of greening direct payments is determined by two factors. First, the implementation of the green measures increases the costs of farming either directly or in the form of loss in income. Second, various of the green measures (the requirement to maintain the 2014 level of permanent pasture, the requirement for crop diversification and, particularly, the ecological set-aside) will have an impact on supply and thus market prices. Thus, the greening leads to an increase of agricultural prices which tends to counterbalance the impact of the measures on cost.

The study concludes that the cost of greening will amount to €33/ha of potentially eligible area (PEA) in 2020. Just half of this figure is the cost of maintaining permanent grassland (€17/ha PEA). I have not been able to find any IACS figures on the size of the EU eligible area (if anyone knows where these can be found, please let me know). But the Commission estimates that the average direct payment will be €267 per ha PEA and, assuming a budget for direct payments of around €40 billion, this works out at a PEA of 151 million ha in 2020 (this compares to a utilised agricultural area of 178 million ha in EU-27 today). Using this figure, the cost of greening would amount to approximately €5 billion. This compares to the value of the green payment (30% of €40 bn) of around €12 billion.

Costs for the maintenance of permanent grassland and the ecological set-aside are in general the highest. For instance, among regions, the cost of maintaining permanent grassland in areas where an alternative use of land exists varies between €5 and €620/ha, with an EU average of €216/ha of grassland. With 5% of set-aside, the average cost per ha of land to be set-aside is €260/ha, but in some regions the costs per ha are more than €1,000. When the cost of greening is brought back to the total PEA, the amounts are lower. It is estimated that 29% of farms would have a cost between €15 and €30/ha of PEA, 4% would have a cost higher than € 200/ha of PEA, and about 21% of farms would not experience any cost.

In general, the costs are estimated to be highest in the Member States where maintaining large areas of permanent grassland is economically challenging due to pressure to substitute grassland by fodder crops (the Netherlands, Slovenia and Belgium).

It is interesting to speculate what is the value of the environmental benefit to be gained from incurring this cost? The Commission study cannot answer this question because of a lack of data on the environmental impact of the green measures. Instead, it quotes some figures on the land area likely to be affected by these measures.

Overall, for the EU-27, it estimates that 25% of the PEA will be affected. The risk of ploughing permanent grassland is reduced on about 13 million ha. On about 1.7 million ha of land, farmers receive incentives to cultivate alternative crops, mitigating the negative effects of monoculture, while about 3.6 million ha of arable land are set aside for ecological purposes. [It also estimated that an additional 20 million ha of arable land green cover is applied during winter time but, as noted above, this measure seems to have been dropped from the draft regulation].

But, in themselves, these figures do not give any insight into the size of the environmental benefits to be gained on these areas. Given this, it will be hard to answer the question posed at the beginning of this post whether incurring a €5 billion cost in this way is the most effective way of increasing the production of environmental public goods by farming.

Commission methodology

At a technical level, the credibility of the Commission estimates can be assessed by examining the methodology used. The Commission methodology is sophisticated and appears well suited to the task. My main criticism would be with the estimate of the cost of maintaining permanent pasture, which seems to me to be over-estimated. This is because the Commission methodology seems to assume that all permanent pasture that could be converted into arable cropland would be by 2020 in the status quo scenario. Its model does not have the capacity to estimate the proportion of permanent grassland that would actually be under threat in 2020, given the configuration of relative profitability (gross margins) between grazing livestock and other enterprises at that time.

The Commission’s analysis is carried out with FADN data at farm level using the AIDS7K model which covers 81,000 farms in 27 Member States. Expected prices and yield estimates in the scenario year 2020 are based on results taken from the Commission’s AGLINK-COSIMO model. Additionally, the labour input has been adjusted according to observed trends. The following steps are involved.

Crop diversification: This measure requires farms to cultivate at least 3 different crops, with no crop allowed to cover more than a 70% of the total arable land. It is assumed that the profitability of the additional crops corresponds to the average regional gross margin of field crop farms with diversified arable crops. Therefore, the costs are assumed to be equal to the difference between the farm’s individual gross margin of arable land and this average regional gross margin. In the cases where the farm individual gross margin is lower than this regional average it is assumed that there are no additional costs.

Ecological set aside: 5% of arable land has to be taken out of production. Costs for the implementation of the measure arise if the amount of fallow land on the farm is lower than the area to be set-aside. For each hectare to be additionally set aside it is assumed that the costs equal 2/3 of the farm individual gross margin of arable land. The idea is that farmers will set aside the less productive areas first (with the assumption that their gross margin is 2/3 of the farm average).

Preservation of grassland: Farmers have to maintain their permanent grassland. The cost of the implementation of this measure would be an opportunity cost. To estimate this cost, it was necessary to assess on each farm whether there is an opportunity to convert grassland to arable land or not and to quantify the magnitude of the opportunity cost.

There will be little or no opportunity to convert grassland in farms with poor soil quality. For the simulation it is assumed that this is the case on farms with a low share of arable land (less than 5%) and on farms where sheep and goats represent more than 70% of grazing livestock units. Furthermore, it is assumed that rough grazing and 10% of the remaining permanent pastures cannot be converted.

For the remaining permanent pasture it is assumed that the opportunity costs are 2/3 of the difference in gross margins between permanent grassland based dairy and beef production systems and alternative systems at regional level. Only a fraction of the difference is kept in order to take into account that the newly converted grassland would probably not have the same level of productivity as land already in fodder crops (the most productive areas have been converted into arable crops before).

For the calculation of the difference in gross margins at regional level, it is considered that there are no opportunity costs in regions where permanent grassland is not relevant or where there is no alternative identified (no cattle production). Otherwise, in regions where grass-based and forage crops based feeding systems co-exist in specialised farms, it is assumed that the first alternative to cattle production based on grass is to intensify production adapting the feeding system by ploughing the grassland to produce forage crops. Finally, in the remaining regions, where cattle production takes place in mixed cropping-livestock farms, the farm gross margins per hectare of utilised agricultural area in mixed and specialised cropping farms are used.

Green cover: I include this because it is included in the draft Commission study even if it appears to have been dropped from the draft legislative proposal. During winter, farms have to apply green cover on 70% of their arable land and the area covered by permanent crops, excluding the area of ecological set-aside The costs of the implementation of green cover are estimated based on assumptions on the affected area and the costs per ha. As there is no information on green cover available at farm level several assumptions had to be made: first, it was assumed that a large part of the area covered by cereals is covered during the winter, as in most cases a large share of the cereals are winter crops. As in the FADN it is not differentiated between winter and summer crops it was assumed that on each farm the share is equal to the national shares of winter and summer varieties published by EUROSTAT. Furthermore, it was assumed that 30% of the area of permanent crops is already covered. The costs per ha of land to be additionally covered in order to meet the requirement are assumed to be equal to 50€.

Market effects: These gross costs of implementing the green measures are the appropriate measure to compare with the value of the environmental benefits to be achieved. However, in terms of the impact on farm income, these gross costs will be offset by a transfer from consumers through higher commodity prices. These are reported in the Commission study by farm type rather than by commodity. The income effect over all farms is reported to be an increase of +0.6%, with more positive effects on crop farms (2.6%) and grazing drystock farms (+1.2%), while enterprises using grain as a feed are worse off (income on milk farms would fall -0.2% and on pig/poultry farms by -8.4%).

Overall, farm income falls by -2.8% on average in the Integration scenario (which includes the greening option, but also includes the effect of capping, where the money saved by capping and diverted to rural development is assumed lost to farmers). It seems that the positive impact of the market effects from reduced supply do not compensate farmers for the increased cost of implementing green measures in Pillar 1.

Overall, these results are probably quite a good guide to the likely outcomes of the proposals in the draft legislative proposal because, although the green cover requirement is removed (thus reducing costs), the ecological focus area requirement is increased from 5% to 7% (thus raising costs).

Photo downloaded from http://www.flickr.com/photos/13847552@N03/3906560447/ under Creative Commons licence

A new study from the University of Wageningen in the Netherlands has attempted to model the effects of the abolition of EU farm subsidies. The authors of the report state that their study is very much a ‘worst case assessment’ since,

“It does not take into account farmers’ behaviour, although the past has shown that farmers do adapt to changes in the Common Agricultural Policy. It also assumes a fixed cost structure and abstracts from changes in factor prices and structural change, all elements which would reduce the impact of reform on farm incomes.”

The report makes it clear that the effect of subsidies – and their removal – is not felt evenly across Europe. In countries such as the Netherlands, Italy and Belgium the share of farm subsidies in total agricultural output is below or around 10%, in Austria and Slovenia above 30%, in Ireland around 50% and in Finland even above 60%.

The level of subsidies in the grazing livestock sector is the highest, followed by the arable sector. The horticultural sector, and to a lesser extend the wine and intensive livestock sector receive the lowest amount of subsidies related to total output. As the report puts it, “the ‘non-CAP types of farms’ (e.g. horticulture, permanent crops and intensive livestock) have, in general, better prospects than the ‘CAP types of farms’.” Unfortunately, the ‘CAP types of farm’ account for some 95 per cent of EU land devoted to agriculture and so “the deterioration of the viability of these farms as a result of the abolition of the subsidies may have a serious impact on the structure of the farm sector as well as on the vitality of rural areas.”

The report concludes:

“The viability of farms in Spain, Poland, Lithuania, Latvia, Belgium and Austria is hardly affected [by the removal of subsidies], whilst farms in Denmark, Ireland, Sweden and the UK, as well as farms of some types in France, Germany, Hungary and Slovakia are heavily affected. In these countries, abolition of decoupled payments results in a large share of farms with negative farm incomes.”

The analysis looks only at first-order impacts and makes no attempt to predict how farmer behaviour might change were subsidies to be abolished. Even so, the authors point to evidence suggesting the adaptability of agriculture to policy change. For instance, arable Netherlands reacted to decoupling of arable payments and reduction of EU sugar subsidies by growing more intensive crops such as potatoes, vegetables and flower bulbs and less cereals and sugar beet. The authors point out that European farms have long been consolidating into larger units, in response to technological change and market competition. Abolishing subsidies would speed up the existing process of ’structural change’, says the report.

Finally, the report attempts to reach some conclusions about which kinds of farms are best-placed to weather the economic storm that would come with the abolition of subsidies. The report finds that farm size has a bearing on viability but it can work in different ways.

“The direction of this relationship differs between countries. In countries such as Germany, Latvia and Hungary larger farms tend to be less vital. In these countries the cooperative farms are an important reason for this. In other countries such as Belgium, Italy, Ireland, the Netherlands and the UK larger farms tend to be more vital.”

The authors point out that the two main potential problems that would be caused by the abolition of current subsidy system – land abandonment and farm insolvency – could be addressed at less cost than at present with a more targeted approach. This is perhaps the most policy-relevant conclusion of the entire report.

Read: Farm viability in the European Union: Assessment of the impact of changes in farm payments

As Valentin’s blog post yesterday explains, the CAP is not only a European agriculture policy, it’s a European income redistribution policy. The centrepiece of the CAP is the €42 billion a year in ‘direct aids’ or income support to farmers, funded entirely from the pooled EU budget. Valentin points out that in an era of fiscal austerity, the idea of billions of euros moving from one country’s taxpayers to another country’s farmers is likely to be politically controversial. Particularly when the biggest payouts go to Europe’s wealthiest citizens and most profitable companies.

As national governments decide by how much they are going to pay of nurses and school teachers, how many university places they will cut and which taxes they are going to have to increase, the idea that aids to farmers are ringfenced from cuts will come as a surprise to many. But this is exactly what European leaders agreed to in 2002, in a deal devised by Jacques Chirac and Gerhard Schroeder that fixed the CAP’s direct aids budget at a constant level until the end of 2013.

The result is that the German Chancellor Angela Merkel remains committed to the deal agreed by her predecessor, in which Germany will this year put €2.4 billion more into the CAP direct aids budget than it will get out, while Greece will get €1.2 billion more than it puts in. France will remain a net beneficiary although its gains this year of €868 million are set to halve by 2013 to €409 million.

When the protection of the CAP direct aids budget does finally expire, it seems certain that something will have to be put in its place. As the CAP2020 blog reports, a new study on subsidies and farm viability finds that in the absence of subsidies 83% of farms would continue to have a positive farm income but only 18% have a positive farm income once the costs of their own labour and assets are taken into account. Previous studies have suggested that the major impact of removing direct aids is that farm asset values will fall, especially land values. From the point of view of the general public there is no harm in lower land prices, though a young farmer who has taken out a hefty bank loan to buy land or an older farmer who plans to sell his land to provide for a retirement income would be entitled to think otherwise. It doesn’t take a genius to see that the upheavals – political and economical – of an overnight abolition of the current €42 billion a year that goes into the pockets of Europe’s farmers would be such that this is a very unlikely scenario.

There is no shortage of studies pointing failings of the current system of direct aids. Two of the best are the study by Jorge Nuñez Ferrer for the European Parliament and a short paper by the academics David Harvey and Attila Jambor. An excellent new report commissioned by European Parliament looks beyond the problems of current direct aids and considers how they might be replaced by a system that is politically viable but economically rational. A hard task, you might say. The study’s lead authors are Jean-Christophe Bureau, an occasional contributor to this blog, and Heinz-Peter Witzke. I was invited in an informal advisory role along with capreform.eu blogger Alan Matthews and a handful of others.

The report is among the best contributions to the debate on the future of the CAP. It contains a very useful overview of how the various member states line up on key issues and also surveys the various proposals tabled by farm unions and environmental and other civil society organisations. As far as conclusions go, the authors back the ‘public money for public goods’ mantra that was endorsed in a joint statement by Birdlife International and the European Landowners Organisation.

Bureau and Witzke argue there needs to be a gradual transition away from the current distribution of direct aids to one which more accurately reflects the contribution of different farm types towards a variety of public goods. A flat rate per hectare income support payment would remain but should be co-financed, the authors argue, and payment limits should be introduced to very large farms, according to the number of people employed. Member states would be free to shift money from income support into public goods-type schemes. The effect of the proposed system would be considerable redistribution among current winners and losers with the general theme being more support for extensive farming systems, generally to be found in upland regions such as the alpine pasture pictured (above, right).

You can read the 167 page report in full here.

Photo credit: dr3wie // Flickr.com Creative Commons

So, is examination of member states’ financial net contributions a shameful exercise: hiking up national egoism and ignoring the larger benefits of European integration? Not at all. If CAP funds were spent exclusively on European public goods, such as climate change mitigation or the protection of endangered species, national bottom lines would indeed not matter. The money should be allocated wherever greenhouse gas reductions can be achieved most cheaply or where the need for wildlife protection is the greatest.

But as things stand, CAP subsidies are mostly free handouts to member states and their farming communities – they do not create commensurate value for European citizens. This applies in particular to the Single Farm Payment which farmers receive as long as they keep their land in ‘good agricultural and environmental condition’. These minimum conditions largely correspond to the legal baseline – that is, all farmers need to do is to respect the law.

Making those who pay for this waste aware of their unfavorable position actually serves European integration. The CAP absorbs more than 40% of the EU budget, depriving the EU of the renewed momentum it could gain if it became more relevant for attaining the priorities of the future. Citizens are ready to support an EU that creates real value added – by tackling climate change, promoting European infrastructure, or enhancing internal and external security. They are never going to endorse an EU that lavishes money on one politically powerful sector to the detriment of the entire economy.

The distributional issue behind CAP reform will become ever more critical over the next years. Public debts will continue to rise and painful spending cuts will make the population more sensitive to wasteful expenditures. Also, the strain on financial solidarity in the EU provoked by the debt/Euro crisis will spur interest in the transfer mechanisms hidden in the EU budget.

So who is cutting the best deal in the CAP? And who has pulled the short straw? A short paper of mine can be downloaded here. The paper focuses on member states’ receipts of direct income support under the first pillar, which total €42 billion. These are compared with member states’ contributions to financing the direct income support. The national contributions are comprised of the contributions based on value added taxes (VAT) and gross national income (GNI), corrected for the UK rebate and other exceptions.

The most important net contributor to direct income support in 2010 is Germany with €2.44 billion, followed by Italy with a negative net balance of €1.6 billion. Other important net contributors are the Netherlands, Belgium and the United Kingdom.

The biggest beneficiaries, each gaining more than €1 billion, are Greece, Poland and Spain, followed by France, Ireland and Hungary. All these countries defend a large CAP budget and a strong first pillar. Irrespective of their public justification, the money their farmers receive from other member states’ taxpayers certainly plays a role in their love for the old-style CAP.

The net balance for all major net payers will further deteriorate in the coming years. In 2013, Germany will make a net contribution of roughly €3 billion, followed by Italy with €1.9 billion, the Netherlands with €900 million and Belgium with €800 million. The strongest deteriorations in the net balance affect Germany, France, the United Kingdom, Italy and Belgium. France sees its net gains shrink from €868 million in 2010 to less than half in 2013.

Is it advisable for the EU-12 to push for a strong first pillar with much direct income support? Clearly, the EU-12 will be much better off by shifting the money from the CAP to the EU’s cohesion funds. EU-12 member states receive a share of every € spent that is three times higher for cohesion funds than for direct income support under the CAP. The ratio for Estonia is 5, for the Czech Republic, Latvia and Romania 4 or higher, and for Poland and Slowenia above 3.

You can download the entire paper here.

Farm interests routinely threaten that any reduction in support will provoke a slump in production, endangering EU food security, and threatening massive land abandonment to the detriment of rural life and biodiversity. The findings of the Scenar 2020-II – Update of scenario study on agriculture and the rural world, commissioned by DG Agri, strongly contradict such panicmongering about the looming end of EU agriculture.

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?

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. [...]

A recent paper by Beatriz Velaquez from the European Commission throws light on the consequences of moving towards a flat-rate scheme for SPS payments. Drawing on the Impact Analysis for the CAP Health Check proposals and using the FADN database of farm accounts, she examines three options (a) a flat rate scheme with equal payments per hectare across Member States; (b) a flat rate scheme with equal payments per hectare within Member States; and (c) a flat rate scheme with equal payments per entitlement. Her provocative conclusion is that an EU-wide flat rate would do nothing to improve the distributional equity of the SPS payment scheme. This is important given that the only half-concrete commitment in the Presidency conclusions following the recent Agricultural Council meeting was to address the differing level of direct payments between Member States. [...]

Unanimity, like pregnancy, has a binary quality. A decision can’t be ‘virtually unanimous’. But this is just how French farms minister Michel Barnier described this morning’s final compromise agreement on the health check package. So which of the EU 27 member states were unable to acquiesce in the deal? My sources tell Roger Waite tells me it was the UK plus three others (I assume Denmark, Sweden and perhaps the Netherlands or Estonia) Lithuania, Latvia, the Czech Republic, Slovakia [update: and Estonia]. Can well-informed readers offer some further illumination? [...]

In the second of today’s podcasts from the European Parliament, Paulo Casaca MEP gives his immediate reaction to a series of votes on the CAP health check that saw many MEPs break ranks from agreed party lines, evidence of the passions that are aroused when the Parliament debates food and farming. He argues that the Parliament has lost its way on the CAP and must come up with a new vision for the future of the policy. Mr Casaca is a Portuguese member of the Socialist Group and represents the Azores. He sits on the Budget Committee and chairs the pro-CAP reform Land Use & Food Policy Intergroup.

If Europe’s wealthiest landowners, from the Duke of Westminster in the UK to Prince Albert of Monaco to the fabulously-named Johannes Adam Ferdinand Alois Josef Maria Marko d’Aviano Pius von und zu Liechtenstein (aka Hans Adam II, Prince of Liechtenstein) were having sleepless nights over the future of their six and seven figure annual handouts from the Common Agricultural Policy, they can rest assured that they have friends in high places. Or at least, they have friends in the European Parliament. [...]

As Wyn Grant has observed, the Court of Auditors annual report on the 2007 EU budget published on Monday identified a clutch of weaknesses associated with the controls on spending on EU farm policies. The Court observes that “Some 20 percent of payments audited at final beneficiary level and revealed incorrect payments, a limited number of which had a high financial impact.” It concludes that farm subsidies remained “affected by a material level of error of legality and/or regularity”.

Strangely absent from the Court’s report was an evaluation of cross compliance – the environmental and animal health and welfare conditions that are required of all recipients of CAP direct payments: public expenditure which totals some 36 billion euros a year (28 billion euros of which is spent under the Single Payment Scheme). Could this be because the Court has just adopted a separate special report on this very subject? But that the report is being held back until the health check is concluded? [...]

It is sometimes said that the Common Agricultural Policy establishes a level playing field across Europe, allowing farmers to take part in the European single market without fears about a plethora of national subsidies distorting prices, giving some a helping hand and holding others back. If only it were true. The fact is that when it comes to the biggest ticket item in the CAP, the €36 billion in direct payments (the decoupled single payment scheme plus various commodity-linked direct payments), the CAP is far from being a common agricultural policy. [...]

Agra Focus has been conducting a series of interviews on EU farm policy and one of the longest and most interesting to date is with Allan Buckwell. He is currently policy director with the (England and Wales) Country and Land Business Association, but is also chair of the policy committee run by the European Landowners Association. He was for many years a respected agricultural economics and policy academic at the now sadly diminished Wye College. Perhaps his most interesting role in policy terms was when he spent a year in DG Agri in 1995-6 and chaired a group which wrote a report on a Common Agricultural and Rural Policy for Europe. [...]

Czech agriculture minister Petr Gandalovic made an curious statement at the informal Agriculture Council meeting held earlier this week in the French Alps. Mr Gandalovic, who will assume the chairmanship of the Council under the Czech EU Presidency in the first half of 2009, told his colleagues:

“The more specific you make the policy, the more room you give to bureaucrats who make the decisions. Non-targeted payments give more power to farmers.”

In case it’s not clear, Mr Gandalovic was making the case against targeted payments. In doing so, perhaps inadvertently, he touched on a question that goes to the very heart of the debate about the future of the CAP: the extent to which the CAP’s 54 billion euros of annual public expenditure should be targeted on clearly defined objectives and measurable outcomes. It is a debate raging right now within DG Agriculture, a power struggle that is pitting CAP ‘modernisers’ who seek a greater role for the current rural development pillar against CAP ‘consolidators’ who defend the “Fischler settlement” and the current Commission Health Check agenda. What it boils down to is a debate over the fundamental role of public policy in agriculture. [...]

The vast majority of expenditure under the CAP continues to be directed to income support and is not explicitly targeted at responding to biodiversity, or other pressing environmental objectives. According to a new IEEP study for the UK Royal Society for the Protection of Birds (RSPB) the distribution and allocation of CAP funding, and the uses to which it is put to, should be adjusted in order to help meet the EU’s international commitment to halt the loss of biodiversity.

[...]

With the release yesterday of new figures on EU expenditure in 2007, the Commission has been busy spinning the line that farm subsidies no longer account for the biggest item of Brussels spending. Most news outlets have been swallowing this line without taking a closer look at the figures which show that a full 50 billion euros of EU money was spent on farm-based programmes. [...]

The evolution of agricultural land prices and rents can be a good indicator of the effect of agricultural policy, because of the assumption that a significant proportion of the transfers to farmers as a result of such policy are capitalised into land values. Thus, changes in agricultural policy may have implications for land values, and the prospect of capital losses due to a fall in land values can be one source of opposition to such changes.

The issue is relevant in the context of the Commission’s proposals to introduce a ‘regret clause’ with respect to the implementation of the Single Payment Scheme as part of the Health Check. This would allow countries which have implemented the historic model of Single Farm Payments (SFP) to convert to a regional or flat-rate model if they desired.

The impact of such a proposal on land values is clearly one consideration which member state governments would need to consider in contemplating such a move. But the relationship between the SFP and land values is controversial, as I discussed in an earlier post. [...]

The US Congress has just 14 days in which to agree on a new farm bill able to secure the approval of the White House, and time is running out. If a farm bill is not passed by March 15th, then the so-called ‘permanent legislation’, the provisions of the Agricultural Adjustment Act of 1938 and the Agricultural Act of 1949, would again become legally effective. The implications of this happening have recently been analysed by the US Department of Agriculture and would have such a dramatic and perverse effect on US farm programmes that it is most unlikely that Congress would let it happen. But Keith Good’s recent reporting on farmpolicy.com suggests that agreement is proving difficult to reach. There are interesting parallels but also significant differences between farm policy developments in the US and our own farm policy reform in the EU. [...]

One proposal in the Commission’s health check communication of 20 November 2007 is that the member states which still allocate farm subsidies on the basis of historic entitlements should move to the area average system in which allocations are the same across all hectares in a given geographical region. But it looks as though this change will be optional, according to a speech made by Commissioner Fischer Boel in Ireland on 29 January. Moreover, the flat rate system does nothing to address the striking inequalities between member states, which shows that on average, Dutch farmers get €1299 per hectare, while Portuguese farmers get just €88. [...]

Top Commission officials have confirmed that in the face of opposition from four member states (Czech Republic, Germany, Slovakia and the UK) as well as many farm unions, Mariann Fischer Boel has dropped plans to cut the very largest farm subsidy payments by 45 per cent. The plan, which would have affected an estimated 23,000 farms that receive in excess of €300,000 a year, a list which is dominated by Europe’s wealthiest landowners such as the Duke of Westminster, Prince Albert of Monaco and the Crown Prince of Liechtenstein. [...]

A new report commissioned by the Budget Committee of the European Parliament makes interesting reading. The report, written by Jorge Núñez Ferrer (a former Commission fonctionnaire) and Eleni A. Kaditi, both of the Centre for European Policy Studies in Brussels, aims to asses whether the CAP provides ‘added value’. Núñez Ferrer and Kaditi define this as whether “the benefits outweigh the costs, not only of implementing the policy, but also the costs created in other areas.” The authors don’t pull their punches, particularly when it comes to direct payments which, costing some €30 billion a year, are by far the biggest ticket item in the CAP. [...]

It should come as no surprise that the EU level farm union COPA-COGECA’s response to the Commission’s communication on the CAP health check is reminiscent of King Canute, trying to hold back the tide. What is very interesting, however, is that in important areas the response contains dissenting voices (or ‘reserves’) expressed by a handful of COPA-COGECA’s member groups. [...]

The European Parliament’s agriculture committee published a working paper on the CAP health check at the end of last year. Tamsin Cooper and Martin Farmer at IEEP have already argued that from an environmental perspective it lacks ambition and is internally inconsistent. I have looked in detail at the working paper’s proposals for ‘progressive modulation’ which is put forward as an alternative to both the Commission’s proposals on payment limits and increased compulsory modulation. [...]

The European Parliament is seeking an outcome to the CAP Health Check that does not compromise the competitiveness of EU farming or diminish the value of farm subsidy receipts. This is the vision presented in a working document drafted by German MEP Lutz Goepel of the Parliament’s Committee on Agriculture and Rural Development. The paper acknowledges the need for some evolution of the CAP, but presents a sometimes inconsistent set of suggestions, a number of which are likely to run counter to arguments in favour of promoting a more environmentally sustainable CAP. The paper is examined in further detail below. [...]

The objectives of the present incarnation of the CAP are the subject of intense debate in policy circles. Cross compliance is seen by some as a way to justify the Single Payment Scheme, by aligning the receipt of largely untargeted subsidy payments to the delivery of public goods. To some extent this is true. Farmers need to meet a set of fairly basic standards centred on pre-existing EU environment, food safety and animal welfare legislation (called Statutory Management Requirements (SMRs) in CAP jargon). They must also respect a set of baseline soil and habitat maintenance standards (collectively referred to as standards for Good Agricultural and Environmental Condition (GAEC)). In the event of non-compliance, recipients of the Single Payment risk a deduction to the following year’s subsidy payment. [...]

Many people are under the impression that the Commission’s Health Check Communication proposes that all Member States should move towards a flat rate regional single payment system. There is a widespread view that the Health Check would require those Member States which opted for the historic basis to begin to move towards a regional system between 2009 and 2013.

[...]

The major weakness of the Commission’s CAP Health Check Communication is its failure to spell out a rationale for maintaining the Single Farm Payment after 2013. Yet another report, this time commissioned by the European Parliament’s Committee on Budgetary Control, lambasts the lack of efficient targeting and ensuing excessive cost of the SFP system. Written by Jorge Nunez Ferrer and Eleni Kaditi of the Centre for European Policy Studies in Brussels, and not yet published, the report examines both CAP market and rural development expenditures from the perspective whether EU interventions add value, that is, whether the benefits of these policies outweigh their costs. The report’s authors argue that CAP direct payments are highly inefficient and detrimental in terms of efficiency and value added in the way they are designed. [...]

Economists have long been interested in the costs associated with policies transferring income support to farmers. These costs include not only the resource costs associated with distorting production and consumption choices away from the market optimum (assuming that market prices fully reflect the social value placed on resources and outputs), but also the transactions costs of administering and monitoring the policy, indirect costs associated with distortions in other markets (for example, if tax revenue has to be raised to pay for direct payments or export subsidies), as well as rent-seeking costs. [...]

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

The recently leaked Commission Green paper sets the scene for the upcoming health check. What emerges at the moment is a very cautious and minimalist approach, in line with what the Commissioner has been promising for a while. Two things seem striking. The first is the choice to ignore the budget review debate. The second is the lack of courage in confronting the CAP’s failings. [...]

One of the most contentious issues surrounding farm subsidies is how much of what is paid out actually finds its way into the pocket of the farmer, and how much leaks out into rents paid to landlords, prices charged by the companies selling seed, feed, machines, chemical fertilizers, pesticides and other inputs. [...]

Much initial reaction to the Commission’s leaked Health Check proposals has focused on its renewed attempt to introduce a cap on the Single Farm Payment amount which an individual farmer can receive. In fact, the proposal does not amount to a cap in the sense of an absolute ceiling, but takes of the form of a tapered payment Farmers receiving between €100,000 and €200,000 would face a 10% cut, those receiving between €200,000 and €300,000, a 25% cut and those receiving over €300,000, a 45% cut. Jack Thurston’s blog yesterday highlights the limited impact the measure will have.

It might be useful to put the Commission’s proposal in some historical perspective. Capping was part of the Commission’s initial reform proposals in each of the past three CAP reforms – the 1992 MacSharry reform, the 1999 Agenda 2000 reform and the 2003 Mid-Term Review. In this post I review the evolution of this concept and corroborate the implications of the Commission’s Health Check proposals. [...]

Analysis of the Commission’s leaked proposals for the CAP Health Check show that the payment limitations proposal is significantly less ambitious than the proposal made during the Agenda 2000 (1999) and Mid-Term Review (2003) reforms of the CAP. [...]

Leaks from Brussels suggest that capping Single Farm Payments is on the agenda for the forthcoming Health Check. This was mooted at the time of the last reform and defeated by opposition from Britain and Germany who would have lost out the most. [...]