Tag: reform

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Price formation in the market for organic products

The Dutch Authority for Consumers and Markets (ACM, the competition authority) has recently published the second of a series of reports intended to examine if there are market failures that would hinder the development towards sustainable agriculture. Both the 2020 Agro-Nutri Monitor and the 2021 Agro-Nutri Monitor contain an English language summary on which this post is based. The reports are based on research undertaken by Wageningen Economic Research on behalf of ACM.

The reports focus on the markets for organic products, while recognising that there are other sustainability labels in the Dutch retail sector. Given the ambition in the Farm to Fork Strategy to increase the area under organic agriculture to 25%, the question asked by the ACM is of wider European interest.

Food markets are generally either oligopolistic (a small number of suppliers) or oligopsonistic (a small number of buyers). Farmers often have only a small number of processors to choose between, while retail sales are dominated by a small number of purchasing organisations, which potentially gives these organisations pricing power.

One form of market failure could be where the prices paid for sustainable products (in this case, organic products) do not fully compensate for the additional costs of sustainable production.

The suspicion behind the request to ACM from the Ministry for Agriculture for the study was that sustainable production (beyond statutory minimum requirements) does not result in an additional price for primary producers. There may also be barriers to entry for producers as well as anti-competitive practices.

As background, the Netherlands is one of the few EU countries that does not give direct aid to organic producers and growers, so they are dependent on the market price to cover their additional costs. The organic area in the Netherlands was 3.2% of the utilised agricultural area in 2018, compared to an average for the EU-27 of 8.0%.

What the research found

The research over the two years covered eight products (white cabbage for sauerkraut was covered in 2020 but was replaced by brussels sprouts in 2021) covering 67% of the value of Dutch agricultural production (excluding floriculture). The following table shows the distribution of value added along the food chain comparing the conventional and organic varieties for these products for the period 2017-2019.

Source:   Agro-Nutri Monitor 2021 – Hoofdrapport

The gross margin for the primary producer is defined as the selling price (thus it includes expenditure on input costs as well as value added). Generally, the share of the primary producer is higher for the organic alternative, reflecting higher costs of production, and indeed is as high as 62% for organic pork. Organic pears are an exception but this does not necessarily mean that organic pear producers received a lower price than for conventional pears. The other players in the chain might also have adjusted their margins. However, there is evidence in the final two columns that margins of downstream actors in the food chain are adjusted by less than the selling price of organic products relative to conventional products.

The second table below throws light on this by expressing the net margin received by each link in the value chain as a percentage of the turnover of that link (thus measuring profit as a percent of sales for each actor). The first point to note is that, during this period, even conventional milk producers did not make a profit. For the 2017-2018 period covered in the 2020 report, pork producers also did not make a profit, but their income situation improved in 2019 due to the impact of African Swine Fever on market prices.

In general, it seems that the profit rate (measured as a percentage of sales) was lower for organic producers. We cannot conclude from this that their income per kilo or per hectare was lower than for conventional farmers. In fact, with the exception of milk and table potatoes, the production of organic products yielded more profit per kilo for primary producers than conventional products. Profit per hectare would depend on a comparison of the output value per hectare for conventional and organic producers (where organic producers will have higher prices but lower yields, and the relationship between these offsetting factors will vary from product to product).

Source:   Agro-Nutri Monitor 2021 – Hoofdrapport

What is particularly interesting in the table is that the net margin made by traders/processors and supermarkets on organic produce is frequently zero and often negative. This is the case even where the net margin on conventional products is positive. This implies that the mark-up taken by these actors in the food chain does not cover the basic costs of handling organic produce let alone their additional indirect costs (such as higher transactions costs due to lower volumes, a lower turnover rate, or a higher loss or wastage rate).

I had perhaps naively assumed that those who make a conscious choice to purchase organic products would be less price-conscious consumers and thus that demand for organic products would be less elastic than for conventional products. This would allow supermarkets to charge a higher mark-up on their organic sales if this were the case.

However, some digging around turns up evidence that the demand for organic produce can be more price elastic than for conventional produce. This is supported by the Wageningen University analysis in the first Agro-Nutri Monitor that shows high price elasticities among consumers. Another example, a paper by Dr Hanna Lindström at Umeå University in Sweden, also found that the demand for organic milk is relatively elastic, despite relatively small organic price premiums in the Swedish milk market.

High price elasticities might well lead supermarkets to take a lower mark-up on organic products though it would not justify that they would run a loss. This practice suggests the supermarkets concerned may be using the availability of organic produce as a signalling device to position themselves in the market to attract (usually high-income) consumers interested in sustainability into their stores and making up the losses through higher margins on other products.  

The Wageningen analysis for the ACM found that, in general, the additional costs that farmers or growers incur for most of the organic products in the study were compensated by higher market prices, but there is strong variation both over products and over time given variation in yields and prices. The analysis concluded that the main barrier preventing conversion to organic was consumers’ unwillingness to pay the higher price for sustainable products. Conversion costs can also be significant but were not seen as insurmountable. The limited profit margin on organic products in the later stages of the food chain was also noted as a further barrier.

In sectors in which the entry into organic production is relatively large, the additional price for organic products was under pressure in the period studied (dairy farming, potatoes, onions and pork products). In some sectors, such as milk and pork products, processors for organic products work with waiting lists. Discussions with the companies showed that this is an attempt not to let the supply grow too quickly in order to protect the existing organic producers against an oversupply and falling prices.

This underlines the importance of stimulating demand if the area under organic production is to increase significantly. However, as in many other countries, Dutch agriculture is largely dependent on exports, so even a significant increase in home market demand for sustainable products would not be enough.

Conclusions

In summary, the lower or even negative net margins of supermarkets do not suggest that they have greater market power over those farmers who produce sustainably. In fact, it reflects the fundamental unwillingness of (Dutch) consumers to pay more for sustainable produce, which makes it difficult for supermarkets to charge a higher price.

Other research undertaken by ACM found that making the conventional product more expensive but more sustainable will only increase the willingness of consumers to pay for organic products if there are small price differences. In the case of large price differences, making conventional products more expensive and at the same time more sustainable appears to be counterproductive for organic products and attract fewer consumers. ACM draws the (cautious) conclusion that “that providing more information about sustainability characteristics and making conventional products more sustainable and more expensive have little effect on consumers’ willingness to pay for organic products.”

The ACM in its advice to the Ministry based on these reports considered measures both to stimulate the demand for sustainable products as well as measures to limit the supply of conventional products (thus making them more expensive). It stresses that it has not investigated the effectiveness or possible side effects of these measures.

Lowering the VAT rate on sustainable products, or higher taxes on conventional products with the proceeds used to stimulate consumption of sustainable products, are proposed on the demand side. Production-limiting measures might include sustainability agreements between producers or within the chain (here the ACM points out that competition rules provide more scope for such agreements than is sometimes assumed), or even buying-out conventional farmers for whom conversion is not possible.

In either case, the ACM points to the limited effect such measures will have in the Netherlands where exports account for three-quarters of the value added in Dutch agriculture.

This post was written by Alan Matthews.

Photo credit: Camy West via Flickr, used under a CC licence.

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Cyprus Presidency progress report on CAP reform – direct payment controversies

When the Agricultural Council meets tomorrow and Wednesday (18-19 December) it will discuss the Cyprus Presidency’s progress report on CAP reform. As the first day of the December Council is devoted to the annual bargaining over fish quotas, this report will be presented in a public session (with web streaming) on the morning of Wednesday 19th.

The progress report is drawn up by the Presidency on its own initiative and summarises the main amendments to the four main CAP regulations as well as outstanding issues which are left for the Irish Presidency to resolve. As it is highly unlikely that the Irish Presidency will revisit issues unless they are expressly identified as unresolved (in square brackets), the progress report and the accompanying amended draft regulations give us a good idea of the evolution of the Council’s thinking since the end of the Danish Presidency last June.
In addition to the progress report, the latest drafts of the four regulations can be downloaded using the following links.

Latest draft direct payments regulation

Latest draft single CMO regulation

Latest draft rural development regulation

Latest draft horizontal regulation

I look at two of the controversial issues in the direct payments regulation in this post, namely, internal convergence and greening.

Internal convergence

The Presidency organised a discussion on internal convergence at the Special Committee on Agriculture in October. At this meeting most member states expressed opposition to the modalities proposed by the Commission to reach a uniform level of payment by region by 2019 (this included a heavy front loading of the move to a uniform basic payment in the first year plus a uniform green payment for all farms from year 1). This poses enormous political problems for member states using the historic model because it would lead to a profound redistribution between sectors and regions, as well as potentially introducing additional eligible areas which would, in addition, further water down the value of existing entitlements.

Two alternative proposals were circulated by groups of member states.

Ireland, Denmark, Spain, Italy, Luxembourg and Portugal proposed that internal convergence should follow the same rhythm as that for external convergence (flattening of payments across countries) proposed by the Commission (recall that the formula proposed by the Commission was that member states with average payments below 90% of the EU average would close one third of this gap over the MFF period). This would keep the link with historical references for direct payments well into future MFF periods. This partial convergence should take place in equal linear steps up to 2019. Also, the same principle should apply to the green payment which would thus be expressed as a percentage of the basic payment established at the individual farm level rather than of the national or regional flat rate. Further, member states should be allowed to establish a reference year for eligible area in the first allocation of direct payments entitlements prior to 2014, within a period starting in 2009.

Austria, Belgium, Czech Republic, Hungary and Slovenia also circulated a proposal calling for greater flexibility for individual member states. A key demand for this group, which included some new member states, was that the countries applying the SAPS (which is of course a flat-rate system) should not be disadvantaged by any differentiation allowed to the older member states. Thus, they wanted to be allowed also to differentiate payment entitlements depending on the type of land during the transition period. Apart from looking for a longer transition period, this paper proposed a number of options to limit the extent of redistribution among farmers, including a tunnel model (similar but not identical to the ‘MFF’ model proposed by the Ireland et al. group).

A further model proposed by France would give a subsidy premium for the first few hectares of each farm, to address the particular French need to favour generally smaller livestock farms at the expense of more profitable crop farms. France is negotiating on the basis that this premium would apply to hectares equivalent to the average farm size in each EU country, which would be about 50 hectares in France. What is interesting is that this proposal would result in degressivity of payments, something the Commission wanted to achieve via capping but which was opposed by many member states.

The Cyprus Presidency model

What the Cyprus Presidency proposes [in square brackets, so not yet agreed] closely follows the Commission proposal (Article 22 dealing with the value of payments entitlements and convergence). Member states applying the SFP can limit the basic payment to no less than [40%] of the regional reference basic payment (let us call this level the ‘minimum’ basic payment although this term does not appear in the regulation) in the first year. The money ‘saved’ by this would then be recycled to farmers whose existing entitlement values are currently higher than this minimum basic payment, by increasing the value of his/her entitlement by a share of the difference between the current payment and the minimum basic payment. This echoes the Commission proposal but with square brackets around the proportion of the distance to be travelled to be achieved in the first year.

What the Cyprus draft adds is that precisely the same flexibility would be given to new member states using the SAPS and transferring over to the SFP model after 2013. It also would allow a reduction coefficient to convert hectares of permanent grassland where grasses and other herbaceous forage are not the predominant cover into hectares of eligible area, as sought by the Austria et al. group.

An earlier amendment would allow member states which have already adopted either the regional or dynamic hybrid SFP model to keep their existing allocation of entitlements. These member states are given the flexibility to adjust their payment entitlements without any prescriptions.

Significantly, the aspiration to reach internal convergence by a nearby date is retained in the draft regulation even if the 2019 year is in square brackets. “As of claim year [2019] at the latest, all payment entitlements in a Member State or, in case of application of Article 20, in a region, shall have a uniform unit value.”.

The Cyprus model would thus potentially slow down the achievement of a uniform rate compared to the Commission proposal. Member states would also get the flexibility to define the annual progressive modifications of the payment entitlements on the way to uniformity in [2019] in accordance with objective and non-discriminatory criteria.

But, unlike the paper from Ireland et al., the Cyprus model maintains the end goal of a uniform regional or national payment within the next MFF period. It would also retain the green payment as a fixed share of the national ceiling per farm, and not a fixed share of each farm’s basic entitlement, which implies an immediate move to a uniform payment for that element of direct payments from year 1.

It is perhaps not surprising that press reports indicate that many member states expressed their dissatisfaction with the Cyprus proposal at the Special Committee on Agriculture meeting last week. Expect to see many member states make their views known on this issue at the public Council session on Wednesday.

Greening

The entire greening chapter of the direct payments regulation is in square brackets and the progress report notes under outstanding issues included in Heading 2 of the MFF Negotiating Box “the principle of greening of direct payments and the proposed 30% proportion of direct payments subject to greening”. Apparently, even the principle of greening, supposedly the ‘big idea’ of the Ciolos reform and the basis for legitimising the continued high share of the EU budget going to CAP Pillar 1 payments in the Multi-annual Financial Framework, is just about hanging on by its fingernails at this stage of the negotiations.

The Cyprus Presidency draft regulation makes clear how much of the original idea of the Commission of greening as a uniform payment in Pillar 1 to all farms which would be required to follow practices beneficial for the climate and the environment would be changed even if the principle survives.

    The crop diversification requirement would apply only to holdings with more than 15 hectares of arable land with further exemptions for holdings with more than 75% of the total area is permanent grassland or cultivated with crops under water.
    The Commission’s proposal that every farm would be required to maintain its area of permanent grassland (within a 5% tolerance) is weakened by permitting member states, as a ‘derogation’, to suspend this requirement where the national share of permanent pasture in total agricultural area has been maintained (which is the status quo obligation under the Health Check).
    Ecological focus areas are now confined to mainly arable holdings over 15 hectares. Also what counts as ecological focus area is extended to include certain areas of permanent crops as well as areas covered by equivalent practices funded under agri-environment measures in Pillar 2. The 7% figure still appears in square brackets so remains to be decided.

But the big addition is to allow two other measures which are defined as equivalent practices to the three practices proposed by the Commission. These are commitments undertaken as part of agri-environment measures funded under Pillar 2 and environmental certification schemes. While I have been critical of aspects of the equivalence debate, the Cyprus amendments actually propose a rather limited version of equivalence, at least compared to suggestions that member states could also have flexibility to define their own menus of equivalent measures.

Most of the technical adjustments make sense, assuming that broad, uniform measures in Pillar 1 are introduced as a way to green the CAP. They don’t make much difference to the limited environmental impact these broad-brush measures will have, in any case.

While the equivalence measures are more limited than some member states would like, there are still legitimate question marks raised if farms which are funded to undertake certain agricultural practices under Pillar 2 can also claim these for eligibility for the green payment in Pillar 1. At a minimum, there is clearly no additional environmental gain for the taxpayer. And it also raises questions of double funding.

In this connection, the Presidency proposal (Article 29(2)) adds the statement that “[The green payment] shall be without prejudice to the calculation of costs incurred and income foregone for the equivalent practices referred to ….” The meaning of this sentence is not easy to interpret, but one interpretation is that the baseline for Pillar 2 schemes should not be affected by the green practices in Pillar 1.

The double funding issue is also addressed in the revised Article 29 (No double funding) in the draft Horizonal Regulation which now reads:

Except with regard to [support provided for under (agri-environment measures) which is without prejudice to payments under (Article 29(2) of the direct payments regulation)], expenditure financed under the EAFRD shall not be subject of any other financing under the EU budget. (Note that the square brackets are in the original and represent text not yet signed off, while the ordinary brackets contains text which replaces otherwise indecipherable references to specific paragraph numbers and regulations).

The green payment was defended by the Commission as using some of the Pillar 1 money to support practices beneficial to the climate and the environment. Those farmers enrolled in AEMs are certainly farming in more environmentally-friendly ways, but the European taxpayer is already compensating these farmers for the additional costs that they incur. Giving these farmers the green payment in addition, without any further environmental benefit, is simply a total deadweight loss.

Think of the difference it could make if this money were available to expand AEMs in Pillar 2 so that even more farmers would be encouraged to farm in ways beneficial to biodiversity, climate and the provision of ecosystem services.

Picture from: B. Monginoux / Landscape-Photo.net (cc by-nc-nd)

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European Parliament postpones vote on CAP reforms

COMAGRI and the European Parliament have decided to delay their voting on the Commission’s CAP reform proposals until the New Year, according to a report in the UK Farmers’ Guardian today. The new timetable means that it is unlikely that the new regulations can be agreed between the Council and the Parliament until late in the Irish Presidency in the first semester next year.

The latest CAP reform timetable is:

December 15

    – deadline for compromise amendments to be presented to Agriculture Committee.

January 23/24, 2013

    – CAP vote in Agriculture Committee.

March 2013

    – plenary vote in Parliament.

March 2013 onwards

    – trilogue negotiations between EU Commission, Parliament and EU Ministers.

Whether this means that the new CAP regulations can come into force on 1 January 2014 or not is unclear. In the press report quoted above, the NFU calls on the Agriculture Commissioner to prepare transitional rules on the presumption that this is unlikely to happen.

In my opinion, the most likely outcome now is a delay in the introduction of new Pillar 1 arrangements until 1 January 2015, but the introduction of the CMO and RD regulation changes with effect from 1 January 2014.

The heads of EU paying agencies have made clear that considerable time is needed to implement any changes in direct payments regulations in their IT and payments systems. Thus, it would make most sense to roll-over the start of the new direct payments regulation for one further year. This would just require changing the date in the direct payments regulation. Of course, this would not only postpone the introduction of the green payment but also plans for convergence across member states and within member states. The new member states might look for a down-payment on MS convergence but they do not seem to be in a very strong bargaining position to achieve much in that direction.

In the case of rural development programmes, in the absence of new legislation payments to farmers enrolled in existing multi-annual schemes would continue until the end of their contract period, but no enrolment into new schemes could take place. This puts greater pressure on the Parliament, Council and Commisison to ensure early implementation of the new RD Regulation.

However, the goalposts in the new RD Regulation are much clearer than for the new direct payments regulation. Member states are already preparing their rural development programmes and commissioning ex ante evaluations. In any case, a delay of 4 or 5 months into 2014 in launching new RD programmes does not have the same impact as a delay in making direct payments.

What does this delay in the timetable imply for the co-decision process around CAP decision-making?

The Parliament has been quick to point out that the delay is due to the failure of the Council to date to agree on the MFF budget parameters for 2014-20. However, COMAGRI itself has struggled to deal with its role in the first reading process. Currently, it is amalgamating the around 7,500 amendments (admittedly, many of these are pure drafting amendments and there is a good deal of repetition) into a smaller number of compromise amendments on which committee members can vote.

Whether these would have been ready (including being translated into the different EU languages so that committee members understand what they are asked to vote upon) by the next COMAGRI meeting later this month is not clear. So the additional month extension to 15 December is undoubtedly welcome from COMAGRI’s point of view. The process to date underlines that co-decision may be more democratic but it also takes longer.

Update 9 November: I commented above that the NMS might not be happy if 2014 was a transition year to the revised CAP. In fact, there is nothing to prevent the new DP ceilings from coming into force on 1 January 2014 if the CAP agreement following an MFF agreement is delayed until the middle of next year. What would be delayed would be the new rules setting out the basis for entitlements. Here the new NMS might actually welcome a delay as it would mean they could keep the SAPS scheme for one further year, which is one of their negotiating points in the current negotiations.

This post was written by Alan Matthews.

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October Agricultural Council continues CAP debate

Agricultural Ministers continued to grind through their discussions on CAP2020 issues under the Cypriot Presidency at the Agricultural Council meeting on 22 and 23 October earlier this week. Three issues were on the agenda: internal convergence, support for young farmers in Pillar 1, and a strengthened role for producer organisations. The background note prepared by the Presidency is here, and the conclusions of the meeting are reported here. The discussions took place on the basis of two questionnaires circulated by the Presidency on internal convergence and young farmers, respectively.

Internal convergence

Many member states applying the Single Payment Scheme (SPS) have voiced concerns about the difficulties in achieving a uniform level of distribution of direct support at national or regional level (internal convergence) by 2019. The Commission has indicated its openness to address these concerns and to consider suggestions for some flexibility in the rhythm and methodology of progress, without prejudice to the principle of achieving internal convergence. The ministers discussed what form such flexibilities might take.

Many Ministers accepted that a direct payment system based on a purely historical payment level was outdated and that member states applying the SPS should achieve significant and irreversible progress towards internal convergence by 2019. Others question the overall objective of the proposal in an almost fully decoupled system and requested flexibility.

While some Ministers supported the rhythm and methodology proposed by the Commission, most requested adjustments, particularly a smaller first step in 2014, taking account of greening payments, a longer transition period (beyond 2019) and a parallel approach on internal and external convergence.

In return, some Ministers wanted any flexibility on internal convergence to imply less generous possibilities for coupled aid. A number of member states applying the single area payment scheme (SAPS) made clear that their support for the flexibility requested by member states applying the SPS was conditional on a satisfactory reply to their request for some recent historical elements (national top-ups, coupled support) to be taken into account in their transition to the new payment scheme

Young farmers’ Scheme

The Commission proposed a young farmers scheme under both pillars of the CAP, including that the scheme in the first pillar should be of a mandatory nature. However, the progress report drawn up under the Danish Presidency in June 2012 noted that “while the special scheme for young farmers is broadly welcomed, a majority of delegations want a voluntary scheme, leaving Member States to decide whether to operate the scheme and how to shape it according to their needs, while other delegations could support the proposed mandatory scheme.”

A new proposal has been recently debated at Working Party level that in effect implies that member states would be required to implement a scheme in favour of young farmers either under the first or under the second pillar. After the Council meeting, the Presidency concluded that almost all delegations acknowledged that ageing of the farming population is an issue which should be addressed in an effective and appropriate manner. However, it also noted there was insufficient support for a mandatory 1st pillar scheme alongside the voluntary 2nd pillar scheme (as proposed by the Commission), as well as for the alternative suggestion for a mandatory 1st pillar scheme with an opt-out for Member States supporting young farmers under the 2nd pillar. Ministers are clearly sticking to their desire that the Pillar 1 scheme should be completely voluntary.

Producer organisations

The proposal for a Single CMO regulation includes measures to strengthen the bargaining power of farmers and improve the functioning of the food supply chain. Specifically, the Commission proposes to extend the rules for producer organisations (POs), associations of producer organisations (APOs) and inter-branch organisations (IBOs) in the fruit and vegetables sector to all sectors. The progress report established by the Danish Presidency in June 2012 highlighted that a majority of delegations oppose the proposed obligatory recognition of these organisations in all sectors, and instead support the Presidency suggested amendment whereby recognition is voluntary.

At this week’s meeting, Ministers continued to disagree on how best to achieve the objective of strengthening the position of primary producers in the food chain. The Presidency conclusions recognised that there was insufficient support for the proposed compulsory recognition of producer and inter-branch organisations in all sectors, nor for adding specific other sectors to those already subject to such recognition (among others the milk sector and the fruit and vegetables sectors). Concerning competition rules most delegations supported the Commission proposal but a number of others considered that more work had to be done at the technical level with regard to the approach to producer organisations holding a dominant position on the market.

Next steps

The Cypriot Presidency still hopes that the Council can adopt a partial general approach on the main CAP regulations in November or December. At this stage, all eyes are on the publication of the budget numbers in the MFF negotiating box which the Presidency has promised to release before the end of this month. The next meeting of Agricultural Ministers is scheduled for 28-29 November. This is a week after the special European Council meeting called specifically to discuss the MFF budget proposals for the 2014-2020 period. The outcome of that meeting will tell us whether the CAP reform timeline is on target or not.

This post was written by Alan Matthews.

Picture credit: Consilium photographic library

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Perspectives on the CAP2020 debate

I am currently in Brazil attending the 28th International Conference of Agricultural Economists. Yesterday, there was a well-attended session on “The European Union’s Common Agricultural Policy after 2013: what is happening, what is likely to happen, and why?” which was designed to provide an opportunity to explain and interpret the CAP reform debate to those attending the conference from other parts of the world. There were three presentations in the session which I link to in this post.

Giovanni Anania (University of Calabria)’s presentation first summarises the Commission’s original Oct 2011 proposals, explains the decision-making process and describes what has happened so far in the negotiations. He then makes an informed speculation on the likely outcome, emphasising the forces pushing for more flexibility in implementing the Commission proposals. He hypothesises that there may be an inverse relationship between the ultimate financial envelope allocated to the CAP and the extent of flexibilities that are ultimately agreed. He concludes that the new CAP is likely to be less innovative than the proposal by the Commission with questionable environmental impact and it could end up being more distorting than the current one.

Jean-Christophe Bureau (AgroParisTech)’s presentation highlighted many points where it is possible to be critical of the Commission’s proposals, but he argued that, taking account of the political economy surrounding the CAP at this point in time, it is actually quite a good set of recommendations. Comparing the Commission’s proposals with what is being proposed in the US farm policy debate, he argued that the overlooked positive aspect of the Commission’s proposal is that it could have been much worse. His conclusion is that economists should try to help clarify and improve the proposal rather than dismiss it.

In my own presentation, I examine the trade and food security impacts of the Commission’s proposals for countries outside the EU. My conclusion is that the overall impacts on the EU’s net trade position and thus on world prices will be very limited. This is because the proposals mainly involve reshuffling and some very limited targeting of the direct payments, and no strong production effects are expected from this. For different reasons, the market management measures proposed (mainly elimination of milk and sugar quotas) are also expected to have very limited impacts (although lower sugar prices will further erode the preferential rents of ACP sugar exporters, which explains why they have signed up with the EU sugar industry to advocate delaying quota elimination until 2020).

Overall, this set of presentations, while differing in their emphases and even assessment of the proposals, provide a useful summary of where we are in the CAP debate at this point in time.

This post was written by Alan Matthews.

Photo credit: European Commission

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Court of Auditors wants clearer objectives for post-2013 CAP reform

The European Court of Auditors is best known as the watchdog of the reliability and legality of the EU’s accounts. In its special reports it often undertakes an assessment of specific areas of Union activity, and it has published various reviews of specific aspects of agricultural expenditure over the years.

It can also submit opinions at the request of one of the other institutions of the Union, and it has just released an opinion on the Commission’s legislative proposals for the CAP post-2013 announced in October 2011.

The opinion focuses on whether and to what extent the Commission’s legislative proposals remedy weaknesses already identified by the Court following its audits. Subsequently it presents some further reflections resulting from the Court’s analysis of the proposals.

The opinion is comprehensive, addressing issues in all four of the main draft regulations in the Commission’s package. One of the guiding principles behind the Court’s observations is whether the proposals facilitate sound financial management by shifting from the current focus on compliance and financial implementation towards a performance-based system, with clear objectives and criteria against which performance can be measured. In this respect, the Court is not impressed:

Despite the claimed focus on results, the policy remains fundamentally input-based (expenditure oriented), and therefore oriented more towards compliance than performance. In particular, the objectives established for direct payments to farmers within the framework of the CAP are not disclosed in the articles of the regulation, nor are their expected results, impacts and indicators. For rural development, a disparate and wide ranging set of objectives are laid down in the regulation which does not include either their expected results and impacts or relevant indicators. Similarly, the objectives and expected results of cross compliance and the ‘greening’ component of direct payments are not adequately defined. The disclosure of these elements would help to focus and target the policy on delivering the desired results.

The Court is also concerned about simplification of CAP regulations, which it relates to the level of administrative and compliance costs which member states and farmers must incur in administering the policy. On this issue, the Court comments as follows:

The limited simplification and additional administrative burdens introduced will have an effect on the costs of the reform which the Commission estimates are likely to represent an increase of 15 % overall. Member States consider that the percentage increase in costs may be even bigger. The Court notes that no information is available to show to what extent these additional costs will be offset by increased management effectiveness or efficiency in delivering the policy.

The opinion also contains observations on other issues that the Court has raised in its audit reports, including confining aid to active farmers, capping and improving the distribution of aid, and improved targeting of investment support to rural areas.

The question is whether the Council, Parliament and Commission will respond to the Court’s criticisms, and how?

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Basic Direct Payments for EU Farmers: The Proposal of the Commission of the EU

Direct payments are the most important budget outlay

EU expenditure on Agriculture and Rural Development makes up a high share of total EU expenditure. The share was – according to official information – 41 per cent of total EU expenditure in 2011 and amounted to €55.269 billion. The position ‘Direct Payments’ was the most important budget outlay during the present Financial Framework with €39.771 billion in 2011; it made up a share of 72 per cent of the total expenditure on Agriculture and Rural Development.

This budget item came into existence in 1993 as the Council of Agricultural Ministers had decided in 1992 to reduce the intervention prices for grain by about 33 per cent and to also reduce the support price for oilseeds. It was a widely held agreement in 1992 that farmers should be fully compensated for the income loss incurred from the price cut. This item grew over time as institutional prices for other agricultural products had to be reduced due to international pressure. However, the income loss incurred by farmers due to these additional price cuts was only partly compensated by additional direct payments. Thus, the first group of farmers was treated better than the following groups.

Direct payments were originally justified with the compensation argument

Even if there was agreement that farmers had to be compensated, there was a widely held understanding that a) it was compensation for the income loss due to reduced institutional prices and b) the compensation had to be tapered off petered out over time. The importance of the development of market prices can be illustrated for the case of wheat. Figure 1 shows the development of intervention and market prices for wheat and the attributed direct payments. It is obvious that market prices did not decline as much as intervention prices; but the latter had been taken for the quantification of the income loss.

Wheat prices in the EU

Moreover, market prices in recent years have even been higher than the prices prior to the price cut. Most likely, prices will stay above the former price level in the coming years . Moreover, independent of the development of market prices, direct payments cannot be justified anymore by the need of adjustment aid. That part of EU agriculture (the Old Member States) which suffered from price reduction has had nearly 20 years for adjustment and thus, sufficient time to adjust. It has to be noted that a large part of EU agriculture (the New Member States) has never been hit by a price cut. In contrast, farmers in the New Member States generally enjoyed a higher income due to EU membership for 10 New Member states in 2004 and the other two in 2007.

The original justification does not hold any more; a new rationale has been proposed by the Commission

One may wonder why the EU Commission, in spite of the evidence, still sticks to the continuation of direct payments. Official statements clearly convey that the Commission is trying to put forward a new justification. It is amazing that the budget request for expenditure based on the new justification is practically identical with the past actual expenditure. The Commission seems to know that exactly the same amo unt of money is needed even if used to serve different purposes.

The Commission proposes two payment parts:

a)    Basic income support through granting basic decoupled direct payments, providing a uniform level of obligatory support to all farmers in the Member States (or in a region) based on transferable entitlements that need to be activated by matching them with eligible agricultural land, plus fulfilment of cross-compliance requirements.
b)    A mandatory “greening” component to support environmental measures applicable across the whole of the EU territory.

It is stated: “The necessary adaptations of the direct payment system relate to the redistribution, redesign and better targeting of support, to add value and quality in spending. There is widespread agreement that the distribution of direct payments should be reviewed and made more understandable to the taxpayer. The criteria should be both economic, in order to fulfil the basic income function of direct payments, and environmental, so as to support for the provision of public goods.”

The statement clearly supports the suspicion that the change is not primarily based on a diagnosis of the present situation and on the identification of market or policy failure. Instead, it is trying to convince the taxpayer that the exact amount of money which has been used to serve one purpose has to be used to deal with another supposed problem. Nevertheless, the new concept pretends to be able to improve the targeting of support. In the following we limit the discussion to the rationale provided for basic payments.

The rationale of basic direct payments is in conflict with social support in the member countries

The Commission argues that the income of farmers is on average lower than the average income of other sectors (see Figures 2 and 3) and, hence, income support is needed. The taxpayer – even with little education in economics – may ask the following questions:

1. Is it the task of the EU to provide for income support of specific sectors?
2. Can the need for social support be based only on a comparison of average incomes?
3. Are there adequate data available for efficient policy measures?

Trends in agricultural income

Relative agricultural income

Is it the task of the EU to provide for income support for specific sectors?

The Treaty of Rome and all the other following Treaties did not mention that the EU has to provide income support for farmers. The Treaties only state as the first two objectives: “The objectives of the common agricultural policy shall be:

a)    to increase agricultural productivity by promoting technical progress, the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour,
b)    thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture.”

It should be noted, that the EU has – according to the Treaty – first of all to contribute to higher agricultural productivity and second, the increase in productivity should ensure a fair standard of living ….The ranking of the objectives is pronounced by the word ‘thus’. Clearly, the Treaties do not mention that the EU should be in charge of securing a ‘basic income’ for farmers.

Indeed, it seems strange that the Community should be responsible for of securing a basic income for a specific sector in the member countries. A policy which aims at securing a minimum (basic) income is obviously part of social policy. But social policy is generally in the realm of the member countries and not of the EU. Nevertheless, the EU Commission is putting forward a recommendation to implement social measures at the EU level. This proposal is not in line with the principle of subsidiarity.

It should also be noted that the proposed payments will slow down structural change and an increase in productivity as compared to a situation without any payments. The marginal producers, i.e. those who are going out of production if revenue declines, will stay in production for longer, leading to inefficient use of resources. Disguised inefficient use of resources in the agricultural sector will continue.

Can the need for support be justified by a comparison of average incomes?

The individual member countries of the EU have established social security policies. These policies do not provide support for specific sectors, but for people who suffer from poverty. In general, applicants for social assistance have to provide information about their household income and, in addition, on the value of their property. Applicants who own property which can be sold are not considered poor.

The EU proposes a completely new criterion for social assistance. All farmers qualify for basic payments, independently of their income. As the payment is related to the area of land cultivated by the individual farmer, owners of large estates will be entitled to higher payments than farmers who cultivate smaller estates. Hence, basic payments increase disparities within the agricultural sector. It is absurd to justify the basic income payments by a comparison of average incomes of sectors and to even support farmers who are considered to be well off by the societies in the member countries.

The proposal for basic payments contradicts the proposal to align payments across the EU member countries

The proposed gradual alignment of direct payments across the EU member countries is even more questionable, based on the new justification of the direct payments. If these payments should provide a minimum income for farmers, as argued by the Commission, the amount of money transferred to farmers in the individual countries should differ, as overall income and social assistance differs across the countries. Therefore, basic income support contradicts the gradual alignment of basic payments across member countries.

Do we actually have information on total labour income of the farming population as compared to that of people working in other sectors of the economy?

The Commission presented information comparing average incomes in agriculture with average incomes in other sectors (see Figures 2 and 3). Such comparisons are highly misleading. First, we do not have exact information on agricultural labour income, as most farmers do not have to submit a tax declaration . We have on the EU level only information on agricultural value added, including the income of all factors of production, i.e. labour, capital and land. EUROSTAT calls the value added per work unit as labour income.

However, not all of total factor income accrues to farm households. Tenants may have to pay rents to non-farmers and farmers may have to pay interest to non-farmers. Calculating this income one may derive a low income for labour, but the farm household may be well-off due to income from capital and land employed outside the agricultural sector. Hence, the calculated income does not inform about the income of farmers and, thus, on the need for financial assistance from the point of view of society at large.

It has to be added that even accurate data on the income of farmers do not inform about the living standard of farmers as compared to the non-farming population. Farmers pay fewer taxes than non-farmers for the same amount of nominal income. Moreover, farmers generally own houses and do not have to pay rent. Finally, many of them own land and capital. Consequently, most farmers do not qualify for social security in their home country due to their income and due to the value of their property. What a strange situation: If the Commission’s proposal is accepted, persons who are not qualified for income support (social security) in their home country will be qualified to receive basic income support from the EU. Can that really be? Is that acceptable?

Do we have information on agricultural labour input?

Calculating income per Work Unit as done by EUROSTAT and accepted by the Commission to support their reasoning, raises some additional problems. EUROSTAT provides information on value added at factor cost and agricultural labour input. Labour input is measured in work units where part-time and seasonal labour is aggregated in full time equivalents .  Even if EUROSTAT had fairly accurate information on agricultural value added, it has no such accurate information on the actual labour force and on that part of the labour force which relies on income from agriculture only. It is known that the share of part-time farming is fairly high in some countries; hence, the information on labour income per person employed is highly misleading.

Take for example the case of a full-time off-farm worker who owns a small farm cultivated by his wife. He may have a high income, but she may have a low income, even if much above the opportunity costs part-time farmers which work with one third of their time on the farm. According to the methodology of EUROSTAT the income of the husband is neglected and the income generated by the wife is multiplied by one third. Consequently, according to this methodology the wife earns an income below that in other sectors. Obviously, the derived information does not inform on the living standard of the family. Needless to say, that this household would not qualify for social security in any of the EU member countries.

Moreover, it is misleading to compare average income if the variance of income in the sectors compared is very high as in agriculture. According to the Commission’s data, 20 per cent of farmers in the EU receive 80 per cent of the present direct payments. Obviously, internal disparity is very high. How can the Commission propose providing for a basic income support for all farmers if some – or even many – have an income which is much higher than the income of the average person in our societies? One should recall that these payments have to be financed by the ordinary taxpayer. The Commission stated that the policy should become more targeted than in the past. The new proposal leads to high conflicts with this objective.

Is the CAP too expensive?

The EU Commission answers this question clearly. ‘No, CAP expenditure on the EU level is only a small share of GDP. The CAP is the only supranationalised policy and the value generated for the money spent is high’ . Whether a policy is too costly or not depends, first of all, on how policy measures are targeted; the less targeted they are the less efficient they are. A policy is well targeted if it heals a market or policy failure more efficiently than any other policy measure.

If the original justification of a policy has become obsolete, a continuation of the same policy is too costly. It is a widely held agreement that a continuation of the present direct payments system cannot be justified with the original arguments. Hence, this policy is too costly. The new justification of changing direct income payments to basic direct income payments clearly shows that a) there is no justification of such a policy measure and b) the justification presented by the EU Commission is based on inadequate information. Is the European taxpayer really willing to pay the high salaries of Commission staff in exchange for such a dubious proposal?

Summing up

The EU Commission’s proposal to introduce changes in direct payments is based on the perception that a new rationale for these payments is needed. The new justification for direct payments proposed by the Commission is not convincing. This new instrument would not contribute to the officially stated agricultural objectives laid down in the Treaty of Rome and which have not been changed; just the opposite, the effects of the new payments would hold back growth in productivity which is the first objective mentioned in the Treaty.

The Commission justifies the proposed basic income payments with the need to secure a basic income. Hence, the instrument could be part of social policy. However, so far the individual member countries of the EU have been in charge of social policy. The introduction of the new instrument would not be in line with the principle of subsidiarity.

The new instrument would be in strong conflict with the principles of social policy in the member countries. Social policy is generally based on information about household income and also takes into account the value of the property. In contrast, the proposal aims at providing basic support to all farmers independently of their actual income and their wealth. As the transfer is proposed to be related to the area used by the individual farms, the transfer to well-off farmers would be higher than for farmers with little land endowment. Disparity in agriculture would be higher than without these transfers.

The new justification put forward by the Commission is based on a comparison of average labour income in agriculture with labour income in the overall economy or in other sectors. Such a comparison can hardly be accepted for justifying socially motivated transfers. Such a policy has to be based on information about household income. Moreover, there is no accurate information on labour income of farmers in the Member Sates

Moreover, the Commission does not have adequate information about the labour income of full-time farmers in the EU.

The conclusion is that the present Commission’s proposal cannot be accepted.

Picture at head of post © Copyright Nigel Mykura and licensed for reuse under this Creative Commons Licence.

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The future for national envelopes and Member State flexibility in Pillar 1

A feature of the move towards decoupled direct payments in the EU since the Fischler 2003 reform has been greater flexibility for Members States in the management of these payments. This can be seen in various ways: the different options on which to base the Single Payment Scheme; different cross compliance requirements including definition of Good Agricultural and Environmental Conditions; different possibilities for modulating payments between Pillar 1 and Pillar 2; and provisions for ‘national envelopes’ and for the retention of partial coupling.

In this post I examine the future for national envelopes and partial coupling in the light of the Commission’s draft regulation on direct payments after 2013. At issue is the extent to which the draft proposals expand the scope for coupled payments and national flexiblity more generally in the post-2013 period.

National envelopes sometimes refer to the overall ceiling on the funding for direct payments allocated to each Member State, but here I use it in the more specific sense to refer to the share of direct payments over which Member States have some discretion over how to make these payments. They have been contested since their introduction as part of the Agenda 2000 reform. On the one hand, proponents argue that they are a response to calls for greater subsidiarity because they give greater flexibility to Member States on how to allocate aid payments to help specific groups of farmers. For this reason, they have been viewed sceptically by other Member States which fear that they could lead to distortions of competition since they are implemented according to national criteria.

Article 69 in the 2003 reform

The 2003 reform allowed Member States to retain up to 10% of their previously coupled payment ceilings under Pillar 1 for specific supports to farming and quality production (Article 69 of Council Regulation (EC) No. 1782/2003). The additional payment had to be granted for specific types of farming which were important for the protection or enhancement of the environment or for improving the quality and marketing of agricultural products. Furthermore, the money had to be returned to the sectors from which it was withheld.

Seven Member States and one region chose to implement national envelopes under Article 69 – Finland, Greece, Italy, Portugal, Slovenia, Spain, Sweden and Scotland (UK) [see Commission summary here]. All Member States which implemented national envelopes used the measure to support the beef sector, with support for the arable and sugar sectors supported by four Member States each. Other sectors for which national envelopes were used included the sheep, dairy, tobacco, olive oil and cotton sectors, with Italy introducing a national envelope for energy crops in 2007.

Article 68 in the 2008 reform

In the 2008 Health Check, Article 69 (now renumbered as Article 68 of Regulation 73/2009) expanded the scope of national envelopes while keeping the overall 10% share of each Member State’s direct payments ceiling [IEEP has a good briefing on this]. Its purpose remains assistance to sectors or regions with particular difficulties but its use became more flexible. Member States can continue to use these payments for environmental measures or improving the quality and marketing of products or animal welfare. However, the money no longer had to be used in the same sector although this option was continued.

But in addition, the national envelope can now be used to help farmers producing milk, beef, goat and sheep meat and rice in disadvantaged regions or to support economically vulnerable types of farming. It can be used to top up entitlements in areas where land abandonment is a threat. It may also be used to support risk management measures such as contributions to crop and animal insurance premia and mutual funds for plant and animal diseases. Countries operating the Single Area Payment Scheme (SAPS) became eligible to use national envelopes for the first time. Moreover, Member States which made use of Article 69 of Regulation (EC) No 1782/2003 were given a transitional period in order to allow for a smooth transition to the new rules for specific support.

In order to comply with WTO Green Box conditions, support for potential trade-distorting measures under Article 68 is limited to 3.5% of national ceilings. This includes support for types of farming important for the protection of the environment, support to address specific disadvantages, and support for mutual funds.

Member States were given three opportunities to make use of Article 68 in that they could notify the Commission of their intentions in August 2009, August 2010 or August 2011. By comparing the Commission’s regular summaries of the implementation details it is clear that use of Article 68 has expanded over time. In the May 2011 summary, only Cyprus, Malta and Luxembourg appeared not to make use of Article 68 at all.


Partial coupling

The provisions for specific support in the national envelope articles should be seen in the context of the possibilities for continuing partial coupling under the Single Payment Scheme. In the 2003 Fischler reform, there was significant scope to retain partial coupling. For example, Member States could continue to couple 25% of arable payments and 40% for durum wheat (Article 66), 50% of payments to sheep and goats (Article 67), 100% suckler cow premium and 40% of slaughter premium or 100% slaughter premium or 75% of special male premium (Article 68). Some coupled payments for minor crops and processing aids also continued.

The 2008 Health Check integrated the partially coupled payments in the arable crops, olive oil and hops sectors into the Single Payment Scheme from 2010. Processing aids and most other coupled payments, including some specific payments in the beef sector, are integrated into the single payment scheme by 2012 at the latest. With the implementation of the Health Check agreement, the suckler cow and sheep and goat premia as well as payments for cotton will be the only formally coupled payments still allowed to remain in 2013.

The amounts available for coupled payments under the Health Check reform (either as partial coupled payments or under the specific support provisions in Article 68) are calculated annually by the Commission. The specified amounts for 2011 can be found here. The share of direct payments which are maintained coupled in 2011 is just under 7% (some minor payments for protein crops, nuts etc. but also cotton are not included). However, the percentages differ quite significantly across individual Member States, as shown in the diagram below.

Share of coupled payments 2011

Portugal, Belgium and Slovenia have the highest shares of coupled payments. For the old Member States, the main coupled payments are the suckler cow premia (Portugal, Belgium, Austria, France and Spain) while in the new Member States the main coupled payments relate to sugar and fruits and vegetables. Also of interest is the balance between residual coupled payments and specific supports introduced under Article 68. For countries to the right of the diagram, the main payments are those under Article 68. Overall, specific supports under Article 68 account for 2.6% of direct payments while residual coupled payments account for 4.0%.

Coupled payments under the Commission’s draft legislative proposal for direct payments post 2013

The main innovation around national envelopes in the draft Regulation is that Article 68 is replaced by a general provision to allow voluntary coupling where certain conditions are met. Member States can grant up to 5% of their national ceiling to sectors or regions where specific types of farming or specific agricultural sectors undergo certain difficulties and are particularly important for economic and/or social reasons. This proportion is increased automatically to 10% of their national ceiling for the new Member States or countries that have provided coupled support to suckler cows (Portugal, Belgium, Austria, France and Spain). If desired, these latter Member States can apply to the Commission to use an unrestricted proportion of their national ceiling for coupled payments provided they meet a series of conditions set out in the draft Regulation.

Furthermore, after 2016, all Member States can apply to increase the specified percentages (5% or 10%, respectively) that apply to them if they can show that an increase is necessary to meet these specified conditions. These conditions include:
– the necessity to sustain a certain level of specific production due to the lack of alternatives and to reduce the risk of production abandonment and the resulting social and/or environmental problems,
– the necessity to provide stable supply to the local processing industry, thus avoiding the negative social and economic consequence of any ensuing restructuring,
– the necessity to compensate disadvantages affecting farmers in a particular sector which are the consequence of continuing disturbances on the related market;
– where the existence of any other support available under the DP Regulation, the RD Regulation or any approved State aid scheme is deemed insufficient to meet the needs referred to in this Article.

As some of the existing coupled payments (sugar, fruits and vegetables) will lapse and be fully integrated into the decoupled payments scheme after 2012, these provisions would seem to give plenty of scope for Member States to maintain or even increase coupled payments after 2013. Particularly the inclusion of market disturbance as a justification for specific payments is a new departure, even if the scope of these measures is limited to maintaining the existing level of production but not increasing it.

On the other hand, Member States will lose the possibility to provide support to specific agricultural activities entailing agri-environment benefits under Pillar 1 (the current Article 68(1)(v)), while support for risk management schemes are also moved to Pillar 2. Whether any Member State will feel strong enough about these omissions to fight for their retention in Pillar 1 remains to be seen.

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Ciolos hearing at the House of Commons

On 13 January, Dacian Ciolos gave testimony to the UK Environment, Food and Rural Affairs Committee on CAP reform.

Emphasis on international competition as a justification for income support

I don’t see how our agriculture can, at the same time, be competitive in the international market and have higher level of standards than farmers in other parts of the world.

But if we don’t have this minimum support for income and compensatory payments, the risk is that a lot of farmers who can be competitive without the crosscompliance rules that we have in Europe but not in other parts of the world-who in normal situations can be competitive-will not be competitive.

Active farmers

Ciolos showed strong commitment to the concept of ‘active farmers’. He stated one minimum requirement clearly. When asked whether he would “expect some agricultural goods to be produced for someone to be defined as an active farmer?”, Mr. Ciolos responded ‘Yes. If not, we cannot talk about agriculture or the farmer.’ But otherwise, he provided little substance on how a practical definition could look like, and he admitted:

We can’t expect to have a common definition at European level. This is why now the objective of the Commission is to come with, let’s say, a negative definition-who is not an active farmer-and then the Member States will define who is an active farmer, taking into account the specific situation at national level.

Cap on direct income support

Mr. Ciolos supported the idea of a cap. But when asked whether there is ‘a danger that the larger farm holdings will simpler reorganise themselves into smaller holdings to get around any cap’, he did not offer much clarification:

Especially with big farms, I don’t think their objective is only to have a big amount of payments from public money. I don’t think that we will have a very important phenomenon of the splitting or separation of farms only to have payments. I think a farmer uses other logic when he decides on the structure of production and farms, and is thinking not only about having a level of direct payments.

Small farms

The idea is not to increase direct payments for small farms, but to make them simpler, and then to propose a lot of instruments-like training, investment and organisation of production groups-in order to integrate the small farms more into the market than at present.

We propose to generalise decoupled payments in all Europe and to maintain coupled payments only in some specific regions, for some specific products.

Financial allocation within the first pillar

Q: ‘How do you envisage money being shared between the two main elements of the new direct payments-that is, basic income support and the greening component?’

We are analysing several scenarios, but I think we can go up to maybe one third of the direct payments being linked to the production and delivery of public goods of greening.

Q: ‘Are you considering basing the payment for greening activities in Pillar 1 on objective criteria, such as the additional cost of delivery or the environmental benefit?’

I can see that this part of the greening payments is exactly the level of the production costs for a farm that decides to integrate this measure. The objective, in fact, for us is to use this part of the payments to incentivise a farmer to do more, not only to have a payment in exchange.

Further remarks

The oral evidence shows nicely the broadly practiced art of claiming, at the same time, that the CAP creates no distortions in the international economy (‘I don’t think that we can now say that we influence the level of prices in countries in the south.’) and that similar levels of payment are needed within the EU to avoid distortions (‘Here we can have a distortion in the market if categories of farms have different treatment.’).

Mr. Ciolos denied again that there is any conflict between supporting the delivery of public goods and the standard of living of farmers.

Of course, I don’t think there’s a contradiction between these two objectives, but it will depend on the resources that we have for the Common Agricultural Policy.

I don’t think that there is a tension in the CAP between ensuring good standards of living of farmers and the delivery of public goods if the first Pillar of direct payment is reformed

He furthermore repeated the idea that agriculture is more affected by governmental regulation than other sectors:

It’s the only sector, I think, in Europe that has to play an economic role and plays a part in the market but, at the same time, has to integrate a lot of rules imposed by society. The automotive industry, the textile industry and other industries do not integrate a lot of expectations from people in the way that agriculture does.

I am sure that a list of the costs of regulatory compliance in the automotive industry with all its safety requirements and environmental standards would be quite long. Also, remember the compliance challenge for the chemical industry under REACH. And all the emission standards that affect industrial production in the EU (and which do not apply to imports). And all the legislation on work safety, healthy working conditions, employee rights and job security that affect large companies much more than small farms.

A last point:

I also remind you that the discussion in Doha was not blocked because of the resistance of the European Union, but because of the resistance of the other partners

It’s true: the recent stalemates have not been directly provoked by the CAP. But weak and conservative signals on agriculture from the EU at the beginning of the Doha-Round did quite a bit in bogging negotiations down. With a clear and early commitment from the EU that substantial agricultural liberalization is on the negotiating table, the Doha negotiations might have take a different path.

You can download the transcript here. Please note: The transcript is not yet an approved formal record of these proceedings. Any public use of, or reference to, the contents should make clear that neither members nor witnesses have had the opportunity to correct the record.

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Food for thought against food security concerns

World food prices are on the rise again. In December 2010, they exceeded the dramatic peak they had reached during the global food crisis in 2007/08. Add to this threatening megatrends, such as population growth and climate change, and think of recent news about the severe drought in Russia or the once-in-a-century flooding in Australia, both major staple food exporters. Who wouldn’t get an uneasy feeling that the specter of famine might come to haunt Europe again?

The European Commission has concluded in its communication on the post-2013 CAP that the CAP must preserve the EU’s food production potential, ‘so as to guarantee long-term food security for European citizens’. Similarly, ministers of agriculture from 22 member states claim in their Paris Declaration that ‘only an ambitious, continent-wide policy can safeguard Europe’s independence’.

Surprisingly, however, there are no scenarios and no calculations to substantiate this perceived threat. Only the Department for Environment, Food and Rural Affairs (Defra) has conducted a Food Security Assessment. The lessons are clear-cut: there are no discernible dangers for the UK. In a recent working paper, I have looked at the entire EU.

EU food production per capita has constantly increased in the past and far outstrips dietary energy requirements. The share of income that households spend on food has steadily declined. By now, food prices are so low compared to income that even a 10-fold increase in the farm gate price of staple crops would be far off from provoking food scarcity in the EU. Forecasts predict roughly stable or increasing production quantities for the EU – even in the case of subsidy and tariff cuts. The expected main effect of climate change during the coming decades will be to shift production from southern to northern Europe without significantly curtailing overall production.

If food prices rose dramatically, the EU could increase the agricultural area used for growing cereals; in particular, by cutting back on biofuel and livestock production. Furthermore, agricultural labor and capital input could be multiplied. An additional measure would be to enhance investments into agricultural productivity.

The EU does thus not depend on imports for its food security. Still, it’s interesting to have a closer look at EU food imports. Since food prices are so low compared with EU wealth that the EU could afford sufficient imports even if prices rose tenfold (always speaking of basic staples, not caviar and passion fruit), only export restrictions could impair the EU’s import potential. A number of considerations show how unlikely this threat is.

Agricultural markets are becoming thicker: world food trade has increased by 230% between 2000 and 2008 according to the FAO. The greater the volumes, the more food can still be bought on the world market if a given amount of supplies is interrupted.

Export concentration has been low, or at least decreasing, during recent decades in the most important agricultural markets, as Defra notes in its Food Security Assessment. The concentration of countries’ share in world food exports matters because export restrictions are more lucrative and can be more easily upheld if most of the market is in the hands of one or few suppliers.

A significant share of EU imports comes from highly reliable exporters: the US, Switzerland, Canada, Australia and New Zealand. These countries could greatly expand their exports to the EU if the need arose. The other main source of exports to the EU, South America, is decently stable. The figure below shows the market shares of key exporters to the EU (it stems, as the following figures, from the DG Agri MAP newsletter).

Food is a homogenous good if the issue is not taste but calories. If exports of wheat were seriously curtailed, they could be replaced by rice, maize and other grains. Export restrictions are therefore less harmful to importers and less attractive to exporters.

Food is mostly traded on a spot market and can be easily transported. Food thus differs greatly from oil and gas where imports hinge on long-term contracts, pipelines and suitable refineries.

Food production in major exporting countries can be more easily increased than energy production (beyond currently available capacity) as the latter depends on long-term capital investments. If some suppliers restrict their exports, it is thus easier for their competitors to pick up market shares.

No prolonged and encompassing phases of export restrictions have occurred since the Second World War. Export restrictions taken during the 2007/08 price spikes were usually of short duration and limited to one or a few products.

The EU imports relatively little staple food. Most agricultural imports are either feedstuff (soya), ‘luxury’ products (coffee, tea, tobacco, sugar, exotic fruits, meat, food preparations) or products with multiple non-food uses (palm oil). The figures below show this at a highly aggregated level and for the main imported products.

All readers are cordially invited to discuss these issues at a lunch seminar at ECIPE in Brussels on January 26.