“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

The flagship of OECD research is certainly the country-level analysis of agricultural policies, based on Producer and Consumer Support Estimates and enriched by a brief description of recent policy developments in the report on Agricultural Policies in OECD Countries: Monitoring and Evaluation 2009.

New research on the CAP has been presented at an OECD Workshop on the Disaggregated Impacts of CAP Reform in March 2010.

The OECD also prepares a regular report on the Environmental Performance of Agriculture.

Equally important are the thematic research pieces. A 2009 piece on the ‘Adjustment Options and Strategies in the Context of Agricultural Policy Reform and Trade Liberalisation’ compares the liberalization experience in various OECD countries. It concludes that the agricultural sector frequently adapts better to liberalization than expected (greater efficiency, higher quality, different products), so that the need for adjustment policies is often overestimated. Policies to encourage exit from the agricultural sector are beset with the problem of windfall profits (payments for actors that would have left the sector anyway). Adjustment policies should rely, wherever possible, on generally available adjustment measures, including through the social security and tax system.

Especially interesting is the case of sectoral adjustment policies in Australia. The Farm Family Restart Scheme (FFRS) – now renamed into “AAA Farm Help – Supporting Families Through Change” – assists “low-income farmers who cannot borrow against their assets by giving them access to improved welfare support, as well as adjustment assistance for those who wish to leave the industry. It included income support for a maximum period of one year, grant of up to AUD 45 000 for those wishing to leave farming, access to professional advice on the future viability of the farm business, and other forms of counselling. The FFRS operates as a decision support system for farmers considering exiting the industry by giving them access to professional advice on the future viability of their business and on employment opportunities if they choose to exit the industry.“ Quite different from EU round-about handouts!

Another OECD work published in 2009, ‘Managing Risk in Agriculture: A Holistic Approach’, assesses the sources of risks, discusses private and public risk management tools and offers an overview of the implementation of risk management tools in OECD countries. It reveals the complexity of risk management and calls for prudence in designing governmental schemes (so as not to encourage risk-taking and replace private risk management mechanisms).

‘The Implementation Costs of Agricultural Policies’, published in 2007, finds that the advantages of targeting policies at desired outcomes outweigh the increased transaction costs of implementation for a very broad range of parameters. Furthermore, transaction costs can be much reduced through best practices (especially by the use of information technologies). This undermines the standard argument that the need to avoid excessive transaction costs makes a blunt policy like the Single Farm Payment inevitable.

The proposal, which comes from BirdLife International, the European Environmental Bureau, the European Forum on Nature Conservation and Pastoralism, the International Federation of Organic Agriculture Movements and WWF, begins with a fierce critique of the current CAP. It is argued that most of the €55 billion spent by the EU on the CAP “still goes to a very small number of large or resource intensive farms, and all too often to those engaged in unsustainable practices.” The leaps in agricultural productivity in the EU over the past 50 years have

“been based primarily on unsustainable use of natural resources and has brought significant negative environmental effects.”

Specifically, the proposal refers to over-exploitation of water, over-reliance on fossil fuels inputs, soil erosion and depletion of soil fertility, loss of biodiversity, decline in the character of landscape, pollution of rivers and seas and increased pesticide residues in foods. Climate change means this model of intensive agriculture will become ever less sustainable than it already is. Meanwhile, European farming has shed much of its workforce and many of Europe’s remote rural areas are in apparently terminal social, environmental and economic decline.

What is proposed is a new set of objectives for the CAP to replace those set out in the founding treaties and which – quite unbelievably – are transposed word-for-word into the new Lisbon Treaty. The new objectives, it is argued, should be as follows:

• To create the environmental conditions to sustain long-term agricultural production through the protection of ecosystems and their services (soil, air and water) and the sustainable use of natural resources;
• To accelerate the transition toward resource-efficient farming that is less dependent on fossil inputs and more resilient in the face of climate change and other external pressures;
• To promote conditions for the production of safe, healthy and high quality food;
• To maintain and enhance (wild) farmland biodiversity by halting and reversing declines;
• To maintain (domesticated) agricultural biodiversity ;
• To contribute to achieving ‘good status’ in European freshwater systems and adjacent coastal waters;
• To contribute to climate change adaptation and mitigation;
• To support the maintenance of landscapes and a rural heritage rich in aesthetic, cultural or historical value;
• To contribute to the rural vitality of areas highly dependent on agriculture and where this is important to support the viability of those farming systems which underpin the delivery of public goods;
• To promote enhanced animal welfare;
• To support sustainable food systems which better connect producers and consumers.

To deliver on these objectives, the CAP must move away from ‘a logic of dependency and compensation’ to ‘a new contract between farmers and society’ in which farmers are rewarded for their role as land managers providing tangible benfits to society. Public money should be tied to the provision of public goods and no public money should be used to support activities which have adverse environmental impacts (the ‘polluter pays’ principal that is already enshrined in the EU Treaty but which in relation to agriculture is more honoured in the breach than in the observance). The proposal is clear that the current system of cross compliance, in which farmers are apparently paid for observing the law, is not acceptable:

“Payments should not, as a general rule, be made to farmers or land managers for respecting this mandatory baseline.”

Not only that, but the proposal argues the mandatory baseline should be raised with the addition of EU laws on water, soil, pesticides and industrial emissions.

Where the proposal starts to get even more radical is when it asserts that that certain farming systems consistently deliver more public goods than others yet these farming systems are not currently well-supported in the current CAP. The proposal identifies organic farming and high natural value (HNV) farming as the farming systems that should be most heavily supported in the new CAP. Conventional farming, it is argued, does not produce public goods to anywhere near the same extent. Where they do, “this is highly dependent on the management decisions taken by the farmer and is often not an inherent product of a conventional farming approach”.

In the context of the CAP, the revolutionary nature of this approach cannot be overstated. Since its inception the CAP has been based around the idea of maximising production by rewarding the most productive, intensive and conventional agriculture. Recent rhetoric about the sustainability of ‘European model of agriculture’ is mostly just that: rhetoric. The dirty secret of European farming is that much of it is among the most intensive in the world. With a large population to feed from a relatively small area of (fairly expensive) land, European farmers choose to apply more chemical fertilizers and pesticides than farmers elsewhere in the world and have to stock their animals more densely. Unsustainable water use is a problem for agriculture the world over, but as the proposal points out, “agriculture accounts for over 60% of total water use in southern EU countries”, much of which is being extracted from underground aquifers far faster than it is be replenished. What BirdLife, WWF and their partners are proposing is a fundamental reorientation of the CAP away from a production-maximising paradigm of agriculture to a sustainability-maximising paradigm.

The proposal argues that the CAP of the past is in part responsible for this unsustainable path and the current CAP does very little to check it, in some cases continuing to reward intensification. It follows that what is required is the complete sweeping away of the current first pillar of the CAP – the market mechanisms, export subsidies and ‘compensatory payments’ for historical cuts to intervention prices that between them amount for the bulk of current CAP expenditure. In their place is proposed five core schemes:

1. Basic Farm Sustainability Scheme. This would be open to all farmers and land managers and would aim to achieve a ‘green transition’ for conventional farming and drive improvements in biodiversity, resource use and landscape character. The payment would be a flat-rate area payment, decoupled from production. The rate would vary by member state or region, within upper and lower limits set at an EU level.

2. High Nature Value System Support Scheme. This would support the maintenance or recovery of farming systems that deliver high levels of public goods but are threatened by marginalisation, abandonment or conversion to intensive farming. Member states would have flexibility to vary the rates of payment according to national priorities.

3. Organic System Support Scheme. This would aim to increase the amount of organic farming in the EU through support for conversion to, and maintenance of, organic farming.

4. Targeted Agri-Environment Schemes. These would be used to address specific problems such as species or habitat loss, soil erosion and salination, water pollution etc. These contracts would be very detailed and targeted.

5. Natura 2000 and Water Framework Directive compensation schemes. These would provide compensation to farmers or land managers subject to specific restrictions arising from these two compulsory EU regulations.

The existing investment grant aids in the CAP’s rural development programmes would be retained but restricted to the provision of public goods and not aimed exclusively at “improving the competitiveness of individual producers”. Investment grants would only be awarded to farms that are already participating in organic, HNV or agri-environment schemes. Farm advisory and agricultural extension services would be provided to address knowledge-gaps among farmers, help them in their ‘green transition’ and assist in the drawing up of land management plans and help with marketing for HNV and organic farms. There would also be separate, non-farm based measures for rural communities threatened by abandonment.

New objectives will require new delivery mechanisms but the proposal makes the case for retaining a common European approach on the grounds that “the EU has the covernance structure to pursue collective action at the required scale”.

While the proposal does defend the idea of a common European agricultural policy, it is neverthless a radical departure from the shared view of European Commission’s DG Agri, the European Parliament’s agriculture committee and most farm ministries and farm unions that basically European farmers are on the right track in terms of sustainability and they just need a substantial, relatively no-strings-attached stream of financial aid to keep them going. What BirdLife, WWF and their partners are saying is that most European farmers are actually on the wrong track and will need to change their ways if they’re going to become sustainability in the future.

Such a radical shift in the paradigm of European farm policy will inevitably result in massive changes to the allocation of the CAP budget at a farm level. Intensive farms producing few public goods would see their support reduced while extensive, HNV and organic farms would get much more. A transitional period is suggested but there is no denying that the politics of ‘robbing Peter to pay Paul’ is toxic. Though not impossible as shown by Michel Barnier who used the CAP ‘health check’ to take money from French barley barons and give it to livestock farmers in upland areas.

The proposal implies a big shift of resources away from supporting conventional farms towards supporting HNV and organic farming. Opponents will inevitably be argued that if the result is that the ‘basic stewardship’ flat-rate scheme (BFSS) is funded at too low level there may well be a large swathe of more commercially-oriented farms that decide not to participate at all and instead to embrace an even more intensive method of production to make up for lost subsidy revenues.

Getting the balance right between achieving suffciently high participation in the BFSS, setting farm-level requirements that represent better value for public money than the current CAP direct payments while delivering a real increase to funding for HNV, organic and agri-environment policies will be a real challenge. If, as is proposed, this balancing act is left to member states, there is a very real risk that the new policy framework will simply be ‘retro-fitted’ onto the existing allocation of subsidies of the currenty CAP, for instance by rebadging SPS/SAPS as the Basic Farm Stewardship Scheme, the existing Less Favoured Area scheme as the HFA scheme and continuing to keep existing organic and agri-environment measures with their relatively low level of funding.

It is to be expected at such an early stage that a proposal such as this should focus on aims, objectives and instruments rather than numbers. Tactically it may be necessary to maintain the coalition that is behind the proposal and to attract more supporters. Sooner or later, however, there will need to be some more detail in the proposal on the allocation of resources between the five core schemes, even if it is just EU guidelines for maximum and minimum payment rates.

The consultation is open and you can read the proposal in full and contribute your own views, over here.

The minister felt that outgoing farm commissioner Mariann Fischer Boel didn’t envisage that pendulum swinging too far, ruling out headage payments, but new commissioner Dacian Ciolos could bring in a new era.

There are certainly those in Brussels who think that Ciolos will favour more market support and help to smaller farms. However, others take the view that he is on message with the Commission view on reform and has been playing down his linkages with France to reassure pro-reform countries.

However, Christmas has come early for some English farmers, with over 80 per cent of farmers receiving £1.3bn in Single Farm Payments to date. That’s approximately £15,116 per recipient. Not quite a banker’s bonus, but welcome all the same. Organicduck tweeted from Devon, ‘Hurrah and thank you RPA. Maybe off Christmas shopping or maybe pay off some overdraft.’ Payments are also well advanced in Wales and Scotland.

The book features chapters from many of the leading lights of in agriculture and trade economics including David Orden, Alan Swinbank, Tim Josling, Harry de Gorter, David Blandford. NGOs analysis are also among the contributors including Ariel Brunner of BirdLife International, an occasional contributor to this blog, Teresa Cavero of Oxfam-Intermon and Carlos Galperín of the Argentinian think tank Centro de Economía Internacional. There are also chapters by Pedro de Camargo Neto, a former trade negotiator for Brazil, and Ann Tutwiler, who was appointed to the Obama Administration in the US earlier in the year with special responsibility for trade and development in Africa. It’s an impressive cast list. One of the book’s contributors, Vincent Chatellier, explains out the kind of subsidies that can qualify for the green box:

Within the green box, there are two types of subsidy. The first relates to public service programmes. This consists mainly of general services such as research, training, dissemination, and inspection (health, safety, quality control and normalisation), sales, promotion and infrastructural services. Domestic food aid or the stockpiling of foodstuffs for purposes of food security also falls into this category. The second concerns direct payments to producers. Article 6, Annex 2 of the URAA (box 1) sets out the conditions that govern the allocation of decoupled income support to the green box. It specifies that these subsidies should not be linked to either production, or factors of production (land and livestock), nor even to an objective price. This applies mainly to income guarantee and security measures (natural disasters, State contribution to crop insurance, etc.) ; to structural adjustment measures (farmers’ retirement schemes, withdrawal of land from production, investment grants) ; and environmental protection programmes.

According to countries’ latest official reports to the WTO, the US provided $76 billion in green box payments in 2007 – over nine-tenths of its total spending – while the EU notified €48 billion ($91 billion) in 2005 , or around half of all support provided by the bloc. The book is the first ever attempt to look at green box support from a ’sustainable development’ viewpoint, examining how payments affect economic, social and environmental progress in both the developed and developing world.

The EU’s embrace of the green box is the legacy of Franz Fischler, whose major reform of the CAP was agreed in 2003 and from 2005 shifted the bulk of taxpayer support for farmers into the green box by maintaining exactly the same distribution of farm subsidy payments as previously but decoupled from current production levels. The G20 grouping of agriculture-oriented developing countries has been quick to argue that, green box or not, the EU’s new decoupled supports could not be non-distorting, as the sheer scale of the payments would insulate farmers against fluctuations in price, provide additional finance for investment. They repeated their refrain, ‘Developing world farmers can compete with farmers in the EU and the US, but we can’t compete with their finance ministries.’

I have always understood that the green colour of the green box comes from the Green means Go of a traffic light (as opposed to the red and amber boxes that are subject to strict limits). But for some, and particularly those politicians who advocate these payments, the hue of the green box owes something to its environmental credentials. In a thorough analysis of the EU situation, Ariel Brunner and Harry Huyton show this argument to be false. They argue that “abuse of the green box is damaging the reputation of agricultural support, which can deliver genuine social and environmental benefits” and that while the current green box rules allow for abuse they mitigate against the kind of environmental support measures that are needed to reverse biodiversity decline.

Brunner and Huyton argue that the single payment scheme, which accounts for the bulk of the CAP’s direct payments to farmers, is not about maintaining environmental, food safety, animal and plant health, and animal welfare standards but about improving farmer incomes. They give a startling example. On the RSPB’s 181-ha arable farm in Cambridgeshire, England it was calculated that the costs of implementing cross-compliance were approximately €75 compared to €27,000 received in direct payments.

Meanwhile, WTO rules on what qualifies for the green box rules out certain agri-environment programmes that seek to pay farmers to enter ‘contracts’ in which they agree to meet specific standards of environmentally-friendly land management. Steenblik and Tsai make a similar point in their chapter on the environment and the green box. This observation leads Brunner and Huyton to argue for a change to the green box rules that would have a profound impact on the measures that are currently designated as green box:

A second fundamental requirement should be introduced, in addition to the current requirement that green box support has no, or at most minimal, trade-distorting effects on production. This should require green box support to be targeted specifically at delivering environmental and social benefits, i.e. “public” benefits that are not already delivered by the market.

This would, at a stroke, disqualify measures that are primarily ‘income support’ policies from the green box and bring the WTO rules into service of BirdLife’s notion of ‘public money for public goods’.

Elsewhere in the book, Carlos Galperín and Ivana Doporto Miguez address the question of whether there is a cumulative effect of green box subsidies when it comes to distorting trade. Taking the reader step-by-step through the micro-economics of farm level production decisions in response to different kinds of subsidies, they show that decoupled support does not impact on short term production decisions, but it does impact on long term decisions about whether to stay in farming or not, and thus favours those farmers in countries with generous income support policies, making life harder for farmers in the developing world where governments are not rich enough to pay similar aids.

Galperín and Doporto Miguez discuss solutions capping green box payments, limiting the overal size of the green box and limiting green box payments to producers not in receipt of support that is designated in any of the other boxes. The fact that they don’t come down in favour of any particular solution to the problem of accumulation of green box supports and the impact on production decisions reveals how far we are from reaching an agreement at the WTO on the subject. The authors concede this is likely to be a subject for negotiations after conclusion, or abandonment, of the current Doha Round. The editors of the book provide a handy table showing the negotiating positions of the various actors at the WTO on key green box issues (see below).

There is plenty more in this book to digest and debate, far more than can be covered in a single blog post but it is clear that the current and future status of the WTO green box is incredibly significant – both for patterns of international trade and for agriculture and environment policies. The book can be ordered here and for those that can’t afford the £80 price tag or want a shorter read there is a 16 page breifing note from International Centre for Trade and Sustainable Development, the NGO that provided the impetus for the book.

The main move was to make an additional €280m of public money available under the Article 186 ‘disturbance clause’ which allows the Commission to step in at short notice when the market collapses. The milk market has hardly collapsed and this is something EU finance ministers may wish to consider when they meet to consider the approval of the move on 19 November.

What the money is to be spent on is yet to be decided, although private storage for cheese has been mentioned. No, this doesn’t mean that members of the public can get a subsidy for filling their fridges with cheese, although anything is possible in the Alice Through the Looking Glass world of the CAP.

What is significant is what was in the Franco-German document that has not been acted upon: official intervention buying of chesse, additional funding for school milk schemes (funding for fruit yoghurt had already been agreed) and more targeted export assistance and subsidies for skimmed milk powder to be used in animal feed.

It was this last measure which had the greatest potential for damage. Commissioner Fischer Boel dismissed it by saying that she had not received any convincing evidence that it would increase demand. What it has done in the past is seriously distort other markets, e.g., for pigmeat.

The notion of freezing quotas had already been knocked off the agenda in September, a singularly ill thought out proposal which would have done nothing in the short run and delayed adjustment in the longer run.

It is worth noting that milk prices have been increasing, by 2 per cent in August while butter has gone up by 4 per cent in France, 8 per cent in Germany and even more in the UL. Intervention buying of skimmed milk powder has virtually come to a halt because the market price is higher that the intervention price.

The average amount paid to about 107,000 English farmers is about £15,300 a year. However, the watchdog found there were substantial overpayments totalling between £55m and £90m but the data was so unreliable the auditors were unable to find out the precise sum. £280m has been set aside to pay Brussels penalties for administrative errors and late payments to farmers, but a further £43m of overpayments are likely to be irrecoverable.

What the report brings out is the high transaction costs incurred even in a supposedly simplified system of subsidies. It is estimated to cost £1,743 to process each farmer’s claim for cash, a rise of 20 per cent in four years.

It is argued that some of the problems arise from the payment system chose by Margaret Beckett, at one time in charge of Defra. The devolved regions opted for a simpler system based on historic payments made to farmers. In Scotland the cost of administering payments is £285 per farmer. However, one reason for choosing an area farmed system was to try to break away from the ‘to him that hath shall be given’ aspect of the subsidies system.

Of course, some might think that we would better off by phasing out subsidies altogether.

Complaining that the farm ministers “have been plucking off my last feather”, she said that this would be the last time:

“There will be no possibility for any delegation to come and ask for more money now. And I say this as I see some other sectors of agriculture facing some problems.”

I hope some of this largesse will be funded from the 99 million euro in levies against member states that have exceeded their milk quota.

With only a few months left in office, this may well be a promise she’s able to keep, though who’s to say what goodies her successor will wish to serve up while settling into his or her new job. One thing is for certain, the farmers will still be there with their begging bowl. After all, Jackie Cahill, president of the Irish Creamery Milk Suppliers’ Association welcomed Fischer Boel’s latest move as follows:

“It is a totally inadequate response with the income situation we have. It is not going anywhere near solving the crisis.”

No good deed goes unpunished.

I replied that if the concern was food insecurity, then it’s worth remembering that the immediate impact of scarcity is to drive up prices. When prices go up, farmers have a very clear incentive to produce more. That’s how a market works. And we have seen this occur over the past two years. As prices have gone up so have crop plantings. I then explained that since the EU’s farm subsidy programmes are almost entirely de-coupled from production, meaning that farmers get the taxpayer-funded aid regardless of whether they produce anything, the dominant effect is price, not subsidy. Subsidies are an income support policy for farmers, just as they are defined in the EU legislation. They do not have an impact on food production. (I know there are those who would say there is always some production impact from giving money to farmers, in general it’s accepted that decoupled payments have the least production impact possible.)

If we can rely on market prices to stimulate farmers to produce the amount of food to meet the society’s needs, what should be the role of government? My view is that aside from any rural economic development policies which may have an agricultural angle, the state should reserve its interventions to securing the long-term sustainability of the land and the broader ecosystems that are required for productive farming (water, pollinating insects, soil) and a pleasant environment. This means making investments in conservation and in limited cases where it can be shown to provide value for money, paying farmers to follow certain kinds of land management practices. It could also mean toughening regulation to prevent over-exploitation of resources in the short term that might limit the future productivity of the land (e.g. mining water, destroying wildlife habitats).

As the BBC’s own Future of Food documentary series argues, the challenge for agriculture now is nothing compared to what it will be in 50 years time, when the effects of climate change, water depletion and peak oil will be much more acute. Farmers, like any businessmen, think mostly short term, at the outside a 5 to 10 year time horizon. Governments need to take the responsibility to think longer term, safeguarding the productive capacity of farm land for the next half century or century. And that means holding the line against the rise of traditional productivist thinking, old or new.