When is enough taxpayer aid enough?

The article below was published in the Irish Farming Independent on Tuesday 17 May (the original article can be read by clicking on this link and choosing the ‘Continue to use Press Display’ option). The article addresses the high dependence of Irish agriculture on public support, but the question I raise has, I think, wider relevance for other EU member states as well. With expectations growing that the June Agricultural Council may announce yet another aid package for the agricultural sector, my question is whether there is a vision for European (and not only Irish) agriculture in which this heavy dependence on public support for income in the sector can be reduced.

“Farm incomes are back in the news again, with milk prices in particular having fallen from their record levels in early 2014. Although Teagasc economists were projecting a further growth of 5% in family farm income in 2016 at their annual Outlook conference last December, this figure will be revised downwards in the light of more disappointing milk returns than expected in the first half of 2016.

Nonetheless, Irish family farm income has been positively buoyant in the past five years compared to the previous five years (see table). The expected fall in 2016 will be nothing like that experienced in the horrible years of 2009 and 2010. Also, the fall in income in 2016 will be cushioned by an allocation of €13.7 million from the EU dairy crisis fund agreed last September, an amount which can be doubled by the national government.

The table also shows the importance of public support to farm incomes in Ireland, principally the Single Farm Payment (now the basic payment and greening top-up) but also including payments under rural development programmes. These subsidies have been much less volatile than family farm income, although they show a gradual decline over time. This reflects in part the impact of the 2013 CAP reform which reduced the overall national ceiling for direct payments, as well as smaller payments under rural development programmes in recent years.

Nonetheless, it is noteworthy how stable public support to farming in Ireland has been despite the enormity of the crisis in the Irish public finances as a result of the financial crisis and bank collapses in 2008, and which led to major cutbacks in public spending in other sectors.

The column showing the value of public support to farming is labelled ‘subsidies’ because this is the technical term used in the national accounts – ‘other subsidies not related to production’. Some of these payments remunerate farmers for the production of public goods when paid through agri-environment programmes funded by the Rural Development Programme, although counted as subsidies in the national accounts. But these are only a tiny part of the total. Most of the expenditure is indeed a pure subsidy to farmers simply because they are farmers.

The importance of these subsidies relative to family farm income should give anyone pause for thought. In all of the past ten years, these transfers from taxpayers have contributed the bulk of family farm income and in four of the ten years they exceeded the income that farmers have made from producing the milk, beef, cereals and other products of farming. In other words, the market return from farming in Ireland is marginal and in many years negative.

Farm organisations will point out that these payments are partly to compensate for higher costs of production in the EU due to the high standards of food safety, animal welfare and environmental management demanded of farmers. They also argue that market prices are depressed because of the imbalances in market power along the food chain.

Indeed, increasing farm margins in the food chain is the top priority for the IFA President Joe Healy in his role as the new Chairman of the Copa-Cogeca Food Chain Working Party. On the other hand, there are additional costs of farm production (in terms of poorer water quality, poorer air quality, larger greenhouse gas emissions and loss of biodiversity) which if reflected in market prices and in the national accounts would tip the scales in the other direction.

But, when is enough enough? Farm groups are now calling for additional support for farm incomes in 2016 because of difficult commodity markets. But family farm income is already almost totally dependent on public subsidies. Are there not progressive voices in the farming industry who worry about this trend and feel a responsibility to reverse it? Is there a vision for Irish agriculture in which targeted public support continues to play a role but to a much less significant extent?

This post was written by Alan Matthews.

Photo credit: Co. Clare landscape © Copyright C O’Flanagan and licensed for reuse under a Creative Commons Licence.

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7 Responses to “When is enough taxpayer aid enough?”

  1. Sebastian Lakner
    May 19, 2016 at 09:18 #

    Well, if there is an overall political consensus to grant income-support to all farmers, why not? My first criticism would be, that there are not enough reliable information on the income- and welfare-situation of farmers. We know the income of farmers, but how about their families. If the income of a farmer is low, but his/her husband/wife has a good income as teacher, lawyer, dentist or whatever, I don’t see strong arguments for a support. But at least in Germany, there is no such information. Besides this, assets of farms are not properly taken into account. So my first criticism would be missing information. And as soon as we have this information, a parliament or a society can decide, to what extent we should support farming. And this decision might be a different one in Romania than in Germany or Ireland. Besides this, a support by the tax-system might be (at least in Germany) much more efficient than giving direct payments, which finally end up to support land-owners. So thanks, Allan for reminding us on the tasks ahead. There is still a lot to do to achieve efficient and transparent policies!

  2. DM
    May 19, 2016 at 10:34 #

    Again and again you make the case for the protection of food supplies although you don’t realise this for a minute. Commodity prices have been rock bottom and profit margins squeezed to nothing. Try feeding a ewe and lamb until sale time and you will find out the facts. increasingly and shamefully the people who are consulted on food have never been required to obtain the experience of producing it. That is a real problem – competence.

  3. Erwin Wauters
    May 19, 2016 at 13:42 #

    Thanks Alan for this food for thought. With regards to the comment by Sebastian: indeed, data collection systems in the EU are inadequate to measure the income and welfare of farm households, something which has been said since long, and was recently (April 7) repeated in a report by the European Court of Auditors. The measure of farm income that is used is an economic indicator for the remuneration of the production factor ‘family labour’, and if such a measure is also a good indicator for farm household income, it’s by chance, not because it is a well designed indicator for farm household income. Hence, with no adequate measure for farm household income, the concept of income support is completely flawed as you cannot measure what you want to support, so there is no way to justify this support based on income data. This could be important as data from the US has shown. In the US, where amongst others, off-farm income is available as well, an average farm household has a total household income exceeding that of an average non-agricultural household, and the biggest subsidies are going to the farm households who would already have a decent income even without the support.
    Nevertheless, the point of Alan that the market remuneration of farm activities is marginal or even negative for a large part of EU farm households remains, in my opinion, true. Even when as a whole, farm household income may be higher than indicated by the indicator ‘farm income’, which would suggest that subsidies cannot be justified, the fact that many farm households use non-agricultural income sources to finance the farm activities is worrying. My opinion is that the prolonged existence of income support measures, from price intervention and export subsidies over coupled towards uncoupled support, has contributed to the creation of farm structure (including financing mechanisms, size, riskiness, debt-to asset ratios, farm organisational types) where the owners of the production factors (the farm households) remain increasingly dependent on either non-agricultural income or income support, and in practice often both. Hence, I think that the agricultural support policies are in some kind of lock-in and it will be difficult to get out.

  4. Alan Matthews →
    May 19, 2016 at 20:41 #

    @DM

    I appreciate that we have different competences. But regarding your claim that prices are rock bottom and profit margins squeezed to nothing, as far as Ireland is concerned I would just ask you to look at the table again. Last year, when the EU agreed to a crisis package for farmers, Irish farm incomes were at a record 10 year high! Yes, prices have fallen since last year and of course there is huge heterogeneity in farming, both across countries and enterprises and across farms. But just for this reason it is wrong to generalise from an individual experience and, for policy purposes, it is important to look at aggregate trends.

  5. Alan Matthews →
    May 19, 2016 at 22:07 #

    @Sebastian, Erwin

    Both of you rightly question how we should interpret the Treaty objective set out for agricultural policy “to ensure a fair standard of living for the agricultural community” and highlight the lack of adequate statistics to measure this income – a point made previously on this blog by Ulrich Koester and Jens-Peter Loy http://capreform.eu/the-use-of-cap-impact-indicators-for-policy-evaluation-2/

    However, Erwin expressed the point I wanted to make more eloquently than I did. While there is much to welcome in the reform of the CAP over the past 20-25 years, we still have an agricultural structure where large swathes remain dependent on public support (or off-farm income) to survive. And has this perpetuation of support resulted in a sector where the main response to periodic crises is the provision of yet further support?

  6. Simon Ward
    May 20, 2016 at 09:55 #

    To use a truism subsidy is important because it is there. The farm system adapts to secure the only risk free income available. Why put it at risk by investing in areas that may or may not increase income? While some may dispute the parallel the removal of subsidy in New Zealand provides at least some guidance. Very few farmers left the industry when subsidy was removed although the supporting industry suffered a lot. Impacts were as expected: rents and land prices fell and fertiliser use collapsed. But there were other interesting changes such as a fall in the head of sheep but an increase in the amount of sheep meat produced. Management changed and resource allocation improved.

    I argue incessantly for the removal of pillar 1 and use of pillar 2 to help with retraining for employment outside of agriculture, improvement of rural infrastructure (at least broadband and ideally transport) and targeting at nationally valued public goods whether environmental diversity or climate change mitigation.

    It is wrong to subsidise when goods are exported arguably either depressing markets for other producers (even where there is no subsidy to enable export) or providing EU subsidised goods (subsidy is never truly decoupled from production) to consumers elsewhere – the EU now runs an agriculture, food and drink surplus with the US so EU resource supports the wealthiest nation on the planet.

    This is not an argument against helping the less well off. We should do. But where it is possible to establish viable businesses this is the primary objective.

    I would argue for dairy support now since Ireland has competitive advantage and it is unexpected global issues that has hit prices. The loss of normally viable dairy farms would extinguish the value of invested capital. It is however wrong to maintain that support when others such as New Zealand are prospering without subsidy. Longer terms farmers are adapt at managing the risks they are aware of.

  7. Nikolay
    June 24, 2016 at 11:27 #

    I’ve been following this blog for a long time, but this is the first time I will dare to comment.
    Because I am from Bulgaria and here we’ve adopted the Single Area Payments Scheme (this meaning I am not quiet aware of the Scheme adopted in Ireland), I am wondering a few things:

    - Is the system adopted in Ireland neutral to all agricultural sectors? I ask this because under SAPS the largest amount (>80%) of direct support in Bulgaria, for instance, goes to field crops operators (grain and oilseeds which give <60% of agri output), meaning that if I take the same figures for my country – other subsidies on production vs farmers' income I won't be able to make a general conclusion that, lets say, income from agriculture as a whole is marginal, because it won't be true.

    - Is there data how much subsidies does eiither sector get (field crops, dairy, beef, fruit, vegs) that can be compared to the output of each sector, so that we probably has a more clear view on the "marginal" sectors?

    Last to say, I don't believe in the importance of Pillar 1, and strongly support its removal. Just recently more and more farmers in Bulgaria started to agree with me.

    Best regards