Update on market crisis measures

There were two occasions last week which provided an opportunity for an update on the market crisis measures taken by the Commission and member states. On Monday 11 April, the AGRIFISH Council was briefed by the Commissioner for Agriculture and Rural Development Phil Hogan on progress in implementation of the market support measures for those sectors that were agreed at its meeting on 14 March. The following day, Tuesday 12 April, the Commissioner addressed the plenary session of the European Parliament on the measures to alleviate the crisis in the European agricultural sector.

The measures taken at the March 2016 AGRIFISH Council were intended to be market-oriented and budget-neutral. They focused amongst others on: a voluntary and temporary regulation of milk production, under articles 222 and 219 of the CMO Regulation; the full use and improvement of existing market measures including a temporary doubling of the quantitative ceilings set out for the public intervention of skimmed milk powder and butter and private storage aid for pig meat; and more flexible state aid support.

This was the second round of crisis measures coming on top of those adopted at the AGRIFISH Council in September last year which led to agreement on a €500 million package of measures designed to help farmers to overcome the crisis (which in turn was additional to those measures that had already been in place in response to the Russian ban).

The September 2015 measures included a targeted aid fund of €420 million allocated to member states in national envelopes, with the option of a 100% top-up using national funds, an enhanced private storage aid scheme for skimmed milk powder, a further private storage aid scheme for cheese, increased rates of advanced payments under the direct payment scheme and rural development programmes and increased funds for food promotion programmes. It was also agreed that efforts to tackle non-trade barriers in third countries and to further develop third country markets should be intensified. A task force on agricultural markets was also established which is expected to present its report in autumn of this year.

In this post, I examine the follow-up actions taken to date with respect to two of the measures proposed at the March 2016 AGRIFISH Council, namely, voluntary supply management in the dairy sector and greater flexibility in the use of state aids.

Application of voluntary supply management (article 222) in the dairy sector

Under this heading the Commission agreed to activate, for a limited period of time, the possibility to enable producer organisations (POs), their associations and interbranch organisations (IBOs) in the dairy sector to establish voluntary agreements on their production and supply. This is permitted under Article 222 of the Common Market Organisation (CMO) in case of severe imbalance in the market and provided specific conditions are met. The necessary legislation was published in the Official Journal last Tuesday and comes into force immediately. A second piece of legislation extended the authorisation for agreements to reduce milk supplies to cooperatives on the grounds that these are entities “established by milk producers”. Note that, while the measures are voluntary for these market actors in the sector, any agreement to limit supply by POs, coops and/or IBOs would likely have to be mandatory for their participating members if the limitations were to be effective.

An NFU Online blog post reports on the discussion at the CMO Livestock Management Committee on the draft texts of this legislation. The Commission calculated that recognised POs and IBOs control only 12% of total EU milk production, hence the need to extend the measure to other bodies in order to have a meaningful impact on the dairy market. Including cooperatives brings in a further 64% of milk production. According to the post, “the Commission were realistic about the likely take-up of the Article 222 measure by the industry”.

The legislation is extremely brief. Apart from authorising voluntary agreements on planning the volume of milk to be produced during a period of six months starting from the date of entry into force of the regulation, and requiring member states to ensure that the agreements do not undermine the proper functioning of the internal market and strictly aim to stabilise the milk sector, it sets out minimal notification requirements. Those behind an agreement must notify the estimated production volume covered and the expected time period of implementation to the member state authority with the highest share of the covered milk production.

There is no obligation to notify the details of the supply constraint (is it the intention to merely stabilise production or to reduce it? Compared to what period? At the end of the six months period, member states must provide an overview of the agreements implemented during the period. These reports will presumably also include information on the size of any financial incentive provided to those POs, coops or IBOs which voluntarily agree to restrict production, if any, and the mechanisms used to implement the supply restrictions.

Strictly, it is entirely up to producer groups and coops to decide if they wish to make use of this exemption from EU competition policy. It is not for the member states to decide whether they wish to participate in this voluntary supply management tool, as Commissioner Hogan has stressed. However, the free-rider problem will militate against any PO or coop or IBO implementing a supply reduction in the hope of influencing the market price without some financial incentive.

It is thus highly likely that member states would need to be involved in providing a financial incentive for a PO, coop or IBO to engage in supply reductions. This means that implementing legislation may also be required at national level where there is a political will to make use of this option. In Germany, according to the dairy spokesperson for the German Farmers’ Union DBV, this could take until June. Even then, he was sceptical that the measure would be implemented in Germany. In France, which was the main proponent of the measure, an initial meeting between the French Ministry of Agriculture and the milk sector was held on 22 March with another scheduled for the beginning of April. However, as I write this, there does not appear to be any further information on what concrete steps might be taken in France.

In summary, although the necessary legislation to allow voluntary management of milk supplies by POs, coops or IBOs is now in place at EU level, there are likely to be few POs, IBOs or coops which believe they have sufficient market power to move milk prices in their favour simply by restricting supply and which would get the agreement of their members to a mandatory reduction in production to allow this to happen.

The availability of a financial incentive from a member state government could, of course, encourage a more positive response. Again, however, it is hard to see why a member state would opt to use its limited financial envelope to assist its farmers in this way. The free-rider problem would mean that one or two member states could end up paying to support the milk price across the EU as a whole. In any case, even if there are member states willing to provide a financial incentive for a voluntary scheme, it seems it will take another couple of months to implement the necessary national rules. If the intention was to have a measure in place prior to the main flush of EU milk production this spring, this is unlikely to happen.

Flexibility in the use of state aids

The focus of much of the crisis package has been to enlarge the possibilities for member states to provide aid to their farmers using national funds (state aids). State aids are rightly disciplined in order to prevent distortions in the internal market and to ensure a level playing field for farmers competing against producers in other member states. However, state aids are permitted in certain limited circumstances set down in the Treaty and interpreted in various Commission regulations and guidelines.

The key derogations in the Treaty from the prohibition on state aids are:

(i) in accordance with Article 107(2)(b) of the Treaty, aid to make good the damage caused by natural disasters or exceptional occurrences is deemed compatible with the internal market;

(ii) on the basis of Articles 107(3)(c) of the Treaty, the Commission may consider compatible with the internal market State aid to promote the economic development of the agricultural and forestry sectors and of rural areas, provided that it does not adversely affect trading conditions.

(iii) In accordance with Article 42 of the Treaty, in the case of products covered by the CAP the rules on State aid apply only to the extent determined by the European Parliament and the Council. Specifically, the CMO Regulation (Article 211) excludes measures financed wholly or partly from the EU budget under that regulation (including crisis measures in relation to a market disturbance) from state aid rules.

These derogations, in turn, are defined more fully in a series of Commission guidelines and regulations. The main ones are:

• 2014 Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020
• 2014 Agricultural Block Exemption Regulation (ABER)
• 2013 Regulation on de minimis aid in the agricultural sector
• 2014 Guidelines on rescuing and restructuring non-financial enterprises in difficulty

The 2014 Guidelines for State aid set out the conditions and criteria under which aid for the agricultural and forestry sectors and for rural areas is considered to be compatible with the conditions of Articles 107(2) and 107(3) of the Treaty. These aids must still be notified to and authorised by the Commission. The ABER identifies a sub-set of these aids where notification is not necessary. The aids covered in the Guidelines are largely rural development as well as risk and crisis management measures, but there is a catch-all paragraph 30 which permits the Commission to assess any aid measure not covered by the Guidelines directly on the basis on Article 107(3). The intention is that the Commission would approve these measures only “if the positive contribution to the development of the sector clearly outweighs the risks of distorting competition in the internal market and affecting trade between Member States”.

The de minimis regulation allows member states to pay up to €15,000 per farm over a three-year period subject to a national cap of 1% of the value of agricultural output. De minimis aid can be paid for almost any purpose and, provided the criteria in the regulation are observed, does not count as state aid. The Guidelines on aid for enterprises in difficulty (which also apply to farms in difficulty) set out the conditions for permitted aid to such enterprises.

There are thus three state aid elements under discussion in the crisis package measures in September 2015 and March 2016:

(i) State aid justified under the CMO Regulation. The September 2015 package included €420 million from the EU budget for exceptional aid to livestock farmers, justified under Article 219 of the CMO Regulation. The envelope was divided among member states according to a distribution key which took account of the size of national milk quotas and national pig populations, the extent of the decrease in the farmgate milk and pig prices, the degree of dependence on the Russian market and the impact of the summer drought on feed prices. The Commissioner has stated that this financial assistance can be used by member states to fund voluntary supply reductions in the milk sector. Importantly, member states were allowed to double this aid from their own national resources, which would constitute state aid justified on the basis of Article 211 of the CMO Regulation. According to the Commissioner, only fourteen member states have so far drawn down €162 million of the money, although others are likely to do so before the 30 June deadline. No information seems to be available on whether any of the fourteen member states decided to add to the EU funding from their own national resources.

(ii) De minimis aid. The March 2016 AGRIFISH Council called on the Commission to review the de minimis ceiling, with a view to raising it from €15,000 to €30,000. The Commission stalled on this measure, stating its preference for the following option, arguing that this could be done immediately and much more quickly than an increase in de minimis ceilings.

(iii) Additional measures accepted as eligible for state aid approval. The March 2016 AGRIFISH Council also called on the Commission to consider the possibility for member states to grant temporary support of up to €15,000 per farmer per year in line with paragraph 30 of the Guidelines on State Aid (see above), including the possibility for the member states to give temporary liquidity support. In response, the Commission undertook to give its full consideration to a temporary acceptance of state aid that would allow member states to provide to a maximum of €15,000 per farmer per year and no national ceiling would apply.

What this means in practice is set out in the Presidency’s background note on the market situation and support measures of 7 April where the Commission is reported as informing a meeting of the Special Committee on Agriculture about the different options available to member states:

- access to temporary finance schemes assessed directly on the basis of Article 107(3)(c) TFEU, and entailing freezing or reducing production,
- access to temporary finance schemes assessed directly on the basis of Article 107(3)(c) TFEU, and entailing the bridging of a liquidity gap, and
- other state aid possibilities such as rescue and restructuring aid for undertakings in difficulty or state aid for closing production capacity.

Financing the freezing or reducing of production is not currently envisaged under the Guidelines for state aid in the agricultural sector, so this represents a new clarification that the Commission will use its discretion under paragraph 30 of the Guidelines for State aids to approve such aids. Liquidity assistance and aid to close capacity is foreseen under the Guidelines on rescuing and restructuring enterprises in difficulty, although generally in the context of a restructuring plan.

More detail is given in the indicative timetable for follow-up action attached to the Presidency note. Here the potential measures are specified more fully as follows:

- State aid scheme for farmers voluntarily freezing or reducing production (compared to a reference period) for up to €15.000 per farm per year (without national ceiling) in the form of a grant, loan or guarantee (for the dairy, pig meat and fruit and vegetable sectors, on the basis of a notification according to 107(3)(c) TFEU).
- State aid scheme for access to finance to bridge a liquidity gap in the form of loans or guarantees (for the dairy, pig meat and fruit and vegetable sectors, on the basis of a notification according to 107(3)(c) TFEU.)
- Rescue and restructuring support (under the horizontal State aid Guidelines)
- State aid for closing of production capacity

These steps are implemented immediately but subject to deadlines inherent in state aid notification procedures. The Commission is working on standard criteria and a template that member states could use to make the case for additional national support of up to E15,000 per farmer per year. This would help to fast-track any applications under the normal state aid notification process. Until we see these criteria, it is hard to evaluate how much of a relaxation of state aid conditions this initiative will be, particularly as all member states can currently give a once-off payment (within a three-year period) of €15,000 to dairy and pig farmers as de minimis aid without any hassle of referring to Brussels.

Conclusions

The Commission response to the current market imbalances in the dairy, pigmeat and fruits and vegetables sectors shows both continuity with the measures adopted in the 2009 milk crisis as well as considerable policy innovation. As in 2009, while using market measures such as public intervention and private storage aid, there has been a strong focus on income support. This has included, as in 2009, both direct aid from the EU budget as well as encouragement to member states to provide additional income support through state aid (see this post for a comparison of the measures adopted in September 2015 with those adopted in 2009).

This time round, there has also been policy innovation. The Commission has, for the first time, triggered Article 222 of the CMO Regulation which allows the temporary suspension of normal competition rules to allow POs, cooperatives and IBOs to work together to limit production in order to raise market prices. It has permitted member states to provide a financial incentive to POs, coops and IBOs which agree to limit production, and has extended the categories of measures which are exempt from state aid rules to include financial incentives which meet the indicated criteria. It has also proposed to exempt state aid schemes for access to finance to bridge a liquidity gap through loans or guarantees from state aid rules.

Recourse to state aids always raises the spectre that some member states may support their farmers to a greater extent than other member states, so diluting the ‘common’ agricultural policy. In this context, we should be mindful that the definition of state aid can also be extended to the tax and social welfare system. For example, the French government announced in February that it would defer €500m in farm tax and social insurance bills for this year. It is worth noting that the decision to exempt member state financial incentives to restrict milk production up to a certain amount from state aid disciplines is actually likely to benefit farmers in other member states rather than tilt the playing field against them.

Agriculture Ministers have promised to return to the market situation at the June AGRIFISH Council, when it may be clearer how much use member states have made of these opportunities to provide additional support to their farmers.

This post was written by Alan Matthews

Photo credit: Mr Martijn VAN DAM, Dutch Minister for Agriculture and Mr Phil HOGAN, Commissioner for Agriculture and Rural Development, European Union Audiovisual Service.

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