Memorandum submitted by the Institute
of Agricultural Management (A 17)
THE PROSPECTS
FOR PRODUCTION
SUBSIDIES
Our expectations concerning the future of subsidy
payments are as follows:
Mid-term review
Milk quota review in 2003
Review of cereal prices in 2002
Review of oilseeds and sugar in 2003
Financial perspective review in 2002
WTO Agenda
Significant increased in market access, particularly
for sugar and milk
Reductions in export subsidies, particularly
sugar, milk and processed foods
Reduction of domestic trade-distorting policies
"blue box payments"
Decisions concerning multifunctionality and
animal welfare.
EU enlargement
"Front-line" states expected to join
in 2004.
The expectation is that reforms in the medium-term
will be relatively small, and will focus on more use of modulation
of CAP payments and cross-compliance. The central issues in policy
reform is likely to be whether it is possible to transfer Area
and Headage payments from Blue to Green Box.
At the moment UK agriculture is almost entirely
dependent on direct payments, total income from farming (TIFF)
is less than the combined value of Arable and Livestock Direct
Payments. In the EU as a whole, agriculture is more dependent
on subsidies now than in most of the last two decades. The removal
of these payments therefore would appear to be disastrous for
UK agriculture.
However, it should be noted that the high levels
of subsidy in recent years have failed to prevent the secular
decline in farm incomes. TIFF has declined in real terms from
£5,100 million in 1973 to £3,500 million in the mid
1980s and £1,900 million in 2000. Only the mid 1990s did
a combination of favourable exchange rates and buoyant world prices
restore TIFF to the level of the early 70s. Since then the decline
has been rapid but really only returns the situation to the long-term
trend.
Thus, whilst the income of the farming community
would doubtless have been even lower in the absence of direct
payments, it is unlikely that current mechanisms, if continued,
will deliver a profitable and sustainable industry.
In addition to failing in its primary objective
of securing an adequate level of remuneration for the majority
of farm businesses, direct payments have other disadvantages notably
the following:
— they are blue box and not easily
turned to green;
— if paid to existing Member States
they must be paid to new Members;
— they inflate land prices and costs;
— they inhibit farmers' freedom to
farm;
— they are costly and crowd out expenditure
on other uses.
In summary, the principal CAP policy mechanisms
disguise the underlying economic realities, and deliver confusing
messages to farmers. They slow the process of agricultural adjustment,
and inhibit the progress of innovators and leaders. They are a
burden to tax payers, damage the image of farming in the eyes
of the rest of society and make farmers vulnerable to changing
political priorities.
We are not advocates of the removal of all public
support to the agricultural sector either in the short or long
run, but take the view that such support should focus on:
1. Paying farmers for the provision of public
goods, ie goods which are desired by the public but which the
market cannot be expected to deliver.
2. Measures designed to assist the process
of structural adjustment. This would include not only greater
assistance to farmers wishing to leave the industry, (particularly
to tenant farmers) but farmers wishing to restructure their farm
businesses.
3. Policies designed to improve the competitiveness
of the UK farming sector defined as the ability to provide the
goods and services which consumers want to buy—better than
anybody else in the world.
BETTER STEWARDSHIP
OF AGRICULTURAL
LAND
It is accepted that during the second half of
the last century, changing agricultural technology, economic relationships
and political agendas have resulted in changes in the rural landscape
and the stock of fauna and flora which many regard as undesirable.
Deciding on the "right" level of these
environmental resources is not easy as it involves putting values
on items which have no market value. It is not best determined
as a result of the outcome of a shouting match between farming
lobbies and increasingly vociferous environmental pressure groups.
The reality is that most rural land and the
wildlife which exists on it will be dependent on or affected by
some form of agricultural activity. Consequently, it is unlikely
that environmental objectives will be met without the active support
of farmers. Existing stocks of environmental resources may be
preserved by regulation, eg laws against removal of hedges and
trees, or the destruction of certain categories of wildlife, but
for the creation of new resources farmers will legitimately expect
to be paid.
There are existing mechanisms for doing this.
Amongst them, Environmentally Sensitive Areas, Countryside Stewardship
Schemes, and various woodland grant schemes feature most prominently.
Whilst these have delivered benefits, evaluations have tended
to suggest that the costs are high in relation to the costs. For
example, an evaluation of the South Downs ESA concluded: The overall
environmental aim of the ESA is "to maintain and enhance
the landscape, wildlife and historical value of the area by encouraging
beneficial agricultural practices". This has not been met
in full. The landscape, wildlife and historical value have been
maintained and there have been important examples of the enhancement,
but these are limited.
There are now 22 ESA's, covering some 10 per
cent of the UK's agricultural area, and there is a further 200,000
hectares under Countryside Stewardship (in England), which is
about 1 per cent. For 90 per cent of the agricultural area, therefore
there is little payment specifically related to the provision
of environmental goods. Many farmers do of their own accord, accept
responsibility for their stewardship role and many spend considerable
sums on the provision of environmental goods. A recent study by
Exeter University concluded that "the average farm in England
and Wales incurs costs in the region of £1,400 annually on
managing and maintaining the countryside that constitutes their
farmland area or some £23ha".
How many of the non-farming population can claim
such virtue?
A dismantling of the Direct Payments arrangement
referred to earlier would release funds for payment to make landscape
improvements and critically would reduce one of the major obstacles
to this which is the loss of Area Payment.
The opportunities and difficulties faced by agriculture
as a result of possible reductions in production subsidies
Present Government policy stresses as a policy
goal the creation of diverse, flexible and competitive agricultural
sector. We concur with this goal and believe it to be achievable.
Diversity can be achieved through a segmentation of farms into
those operating on a large-scale, enjoying a high level of technical
efficiency, capturing scale economies and competitive with the
best producers elsewhere. Alongside there are opportunities for
smaller, mainly family businesses, producing high-value products
(not all food or fibre) competitive not because they are cheap
but because they are serving an increasingly discerning, sometimes
local market. There are an increasing number of outstanding examples
of farms, which are doing just this.
There will be many farms which fall into neither
of these categories. They may lack the capital resources to grow
into the first category, and perhaps their product mix or location
may prevent them joining the second. For these an increasing proportion
of household income will come from off the farm, or at least from
non-agricultural activities. Further injection of funds into the
rural economy can increase the number and range of income-generating
activities, and structural adaptation, through, for example, machinery
and labour sharing, will release human and capital resources into
more remunerative uses.
The challenge of policy-makers is to encourage
and facilitate these evolutionary paths, rather than persist with
out-dated policies which impede them.
Institute of Agricultural Management
14 December 2001
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