Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Memorandum submitted by the Institute of Agricultural Management (A 17)


  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.


  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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