Examination of Witnesses (Questions 80-99)
MR DAVID
ANSELL, MR
CHARLES COURSE,
PROFESSOR JOHN
ALLISTON, AND
MS KATE
RUSSELL
WEDNESDAY 30 JANUARY 2002
80. But if we get rid of subsidies, that we
are going to get cheaper food, it does not seem . . .
(Mr Ansell) It is not getting rid of subsidies, it
is getting rid of some of the external protection that the European
agricultural sector enjoys; so you would get cheaper food coming
in from other parts of the world.
81. But that would happen anyhow, with the World
Trade Organisation's proposals, would it not?
(Mr Ansell) That is the direction we are going in,
yes.
Chairman
82. In your evidence, you are fairly pessimistic
about the prospects for reform of the CAP in the medium term;
you say that, taking together the CAP reform, enlargement, WTO,
the sort of three great peaks on the landscape, as it were, we
are still going to have relatively incremental reform, it is going
to be orientated rather than modulation and cross-compliance.
Why did you come to this sort of relatively pessimistic conclusion?
(Mr Ansell) Largely because my experience is that
agricultural policy reform in Europe has always been very slow,
and I do not see that the forces, pressures, on it have changed
that dramatically. The Agenda 2000 was supposed to provide a new
approach, but really it made only marginal changes, in the end.
So that is one reason. Secondly, I think the degree of support
in other parts of Europe is still a bit uncertain, particularly
in France, and also, to some extent, perhaps, in Germany, later
in the year. It is a medium-term review, as opposed to a sort
of root and branch change; it was designed to go through to 2006.
Major changes would have important redistributional effects, I
think, on the way that the overall CAP budget was spent; probably
it would mean shifts away from northern Europe towards southern
Europe, where, on the whole, they have got more extensive farming
systems. And I think some of the pressures have been reduced,
probably, as well, in the last short period, because of the decision
to phase in payments to new entrants into the European Community,
the central European states, which has taken a bit of the budgetary
pressure off, I think. Similarly, the World Trade Organisation
pressures are perhaps a little less intense than they appeared
a while ago, the Doha Declaration seems to be a rather watered-down
version of what might happen in those talks over the next two
or three years. So my reading of the situation was that we could
not expect major shifts away from the current system dominated
by direct payments, but we could expect more pressure for modulation
of funds and cross-compliance, and so on.
83. You talk about the central matter of transforming
area and headage payments from blue to green box, in other words,
from the non-protected to the sort of protected, non-production-related
sector; what are the changes they would have to undergo, in order
to enable them to get into that box?
(Mr Ansell) That is a slightly grey area, and, of
course, it is a major point of debate within the WTO; but, clearly,
at the moment, the area and headage payments are regarded as blue
box. I think, if you loosened the link further between receipt
of these payments and production then, clearly, that would push
it in that direction. But I think it would need quite a major
change in the way that the headage and area payments are defined
to get them, so that you could argue these had no effect at all
on the level of agricultural protection. The bond scheme is one
way that some researchers are looking to modify those payments,
in order to make it into a green box.
Mr Mitchell
84. How is farm income distributed between different
types of farm, and, as a kind of subordinate to that, since you
say that "UK agriculture is almost entirely dependent on
direct payments," how are the direct payments distributed?
(Mr Ansell) I think that is one of the most important
messages from the past, that, despite the fact that these huge
sums of money have been spent on agricultural support, it has
not succeeded in arresting the decline in farm incomes, apart
from a blip in the nineties. It is clear that there is a great
deal of disparity between the levels of performance though, even
of farms of similar types; you can say that arable farming is
more profitable at certain times than, say, dairy farming, but,
dairy farming, there is an enormous spread of performance. And
what leads to success, I think, continues to be technical excellence,
entrepreneurship, a knowledge of the way that the market-place
is changing and an ability and a willingness to learn and change.
So the answer to the question is that, even within specific farming
types, there is a very wide range of performance; as far as different
sectors are concerned, these change from time to time. But what
is novel about the recent situation, I suppose, is that the incomes
of just about all farming types have declined simultaneously.
It would also be true, of course, the second part of your question,
that a very great deal of the direct payments go to large businesses,
perhaps those that need them less.
85. So the small farmer loses out all round?
(Mr Ansell) Yes.
86. (A) less efficient, and (b) less subsidised?
(Mr Ansell) I would not say, necessarily, that all
small farms are inefficient. I think some of the most efficient
farms that I have come across are small dairy farms.
87. I did not say that, I said less efficient,
less efficient than the large firms?
(Mr Ansell) Not necessarily, depending on what their
business was. Charles probably knows more about this than I do,
but, as far as arable farming is concerned, I would have thought
there is no substitute really for scale, these days. But, I think,
in many of the livestock sectors, small farms, run almost entirely
by family labour, can continue to operate very effectively.
88. But is it efficiency, primarily, that accounts
for the different levels of profitability?
(Mr Ansell) Efficiency, natural resource, endowment,
proximity to markets; but, efficiency, yes, in converting inputs
into profitable output.
(Mr Course) I think, in terms of efficiency, you cannot
ignore the question of scale. I think one of my points earlier
on, in terms of the past subsidy system having sort of crystallised
situations, one of the problems is, it has enabled businesses
that are sub-optimal, in terms of efficiency, to remain in business.
And I think you cannot get away from the fact that, within the
majority of agricultural businesses, there are real economies
of scale, and quite dramatic real economies of scale, and much
of the support system has been designed to make smallish businesses
remain profitable and thus resulted in a disproportionate transfer
of payments to large-scale businesses. One of the encouraging
things, I think, about exposing businesses more closely to market-related
forces, is allowing businesses to restructure and reorganise into
what are economically viable units, in terms of size and in terms
of scale. It comes back to my point earlier on, that the statistics
suggest there is a very large number of farm businesses; the reality
is that many so-called farmers actually have their land farmed
by somebody else, or are involved in ventures with somebody else,
and the reality is that, despite the subsidy systems paid to individual
farm units, the industry has undergone some reorganisation to
achieve better economies of scale. And I would hope very much
that future support mechanisms would encourage more reorganisation
and more restructure of the industry, rather than hamper it; and
I think that is one of the points that we have made slightly,
in this submission, that past subsidy has rather hampered restructuring
and reorganisation of the industry. So I think one should never
lose sight of the importance of scale. Clearly, there will always
be niche operators and niche instances where small-scale producers
identify a particular niche, but niche marketing is not a panacea
for an industry producing 10-15 million tonnes of commodities;
niche markets are not really solutions for large-scale commodity
producers. And I think one has to look at the scale of the overall
industry, in terms of the UK, and one has to take a view about
the supply/demand balance of the individual sectors; and, clearly,
at the present time, we are a successful exporter of combinable
commodities, we are not, for a variety of reasons, a successful
exporter of livestock commodities, and therefore we have a gross
oversupply in certain livestock sectors. And, therefore, it should
not be a surprise that the livestock sectors are very unprofitable,
or high loss-making, when you have a supply/demand imbalance,
which it will take a vast amount of subsidy to redress. And I
think one of the things that, as a society, we have to face up
to is, taking sheep as an example, what scale of sheep industry
can this country actually support, and do we need to support;
and I would hope that what we will see is a support mechanism
that enables that restructuring to take place, not a system that
tries to support a sheep industry of the current size because
that is what somebody has an inherent belief is what we need.
89. When you say niche markets, what do you
mean; is that organics, or what?
(Mr Course) I was thinking of any of the specialist
products, whether it is farmers' markets, whether it is selling
for example long-horn cattle, beef, through a delicatessen, or
a branded product. And I would extend that view slightly and say
that I think, partly as a result of past support, the UK and European
agriculture has not been good at branding its products and looking
at the market. And that is one of the elements that I am encouraged
by, when one looks at the rest of the world, which is more exposed
to a free market, there are better examples, not only at, what
I would say, the slightly trivial, sort of small-scale, sheep's
milk, yoghurt, and things, that is not a panacea for the industry,
whereas branding, in the United States, and any of you who was
at Oxford will have heard the examples given, of very large-scale
branding of grains going into pizza dough, which is a large-scale
solution. The UK industry and the rest of Europe has been, in
my view, particularly bad at trying to brand and market its products,
and there has been a separation, the supply chain actually has
got longer, and there has been too much distance between primary
producers and processors and manufacturers; and that is one of
the points that I think is good, in this, is trying to improve
the supply chain communication.
90. When you say allowing them to restructure,
really you mean forcing them to restructure. How far is this an
argument for cutting off subsidies and direct payments, to force
them, in a Thatcherite way, to die or restructure?
(Mr Course) My view is that, when you look at the
industry, cutting off subsidies, the New Zealand style of cutting
subsidies, clearly, would result in a dramatic restructure of
the industry. One then has to ask, in terms of what society wants
to achieve in terms of rural employment and social infrastructure,
would that go beyond what one wants to achieve across the wider
Europe; and, therefore, I think there are some much more sophisticated
approaches, rather than simply cutting it out altogether.
91. So, by more sophisticated, you mean a more
gradual transition?
(Mr Course) Maybe a more gradual transition, but not
such a blunt instrument, not just cut it out altogether, so that,
cut out subsidy altogether, areas of the country become depopulated,
we do not have any upland hill farms; that is not what society
wants. Whereas what we might have is retirement relief schemes,
or schemes that are targeted specifically; if the conclusion is
that the sheep industry, going back to that example, needs to
decline, maybe there is a scheme that buys up sheep quota and
sort of pays sheep farmers to retire, or encourages co-operation
between sheep farmers, something that is a little bit more specifically
targeted to achieve the reorganisation, rather than a blunt removal
of subsidy. Encompassed within all of the other points that are
being made about environmental goods; which, I think, to some
extent, one takes it as read that there are environmental goods
that society wants that are not best delivered by paying people
simply to farm. But that is a separate issue, which I guess we
will come to.
92. Of course, we are not our own masters there,
in the sense that the New Zealand Government, when it decided
to impose the cold shower of competition and directly cut off
everything, could do that; whereas we are part of a Common Agricultural
Policy which will not allow us to do that?
(Mr Course) I think that is very much the point that
David was making earlier on, that the mid-term review will be
slow. Experience says that, whatever Europe tries to achieve,
it achieves X per cent of it, where X is less than 100, because
you have a common denominator where things get watered down, in
Europe. Yes, that is true. Having said that, within the sort of
CAP framework, we are at liberty to use second-pillar monies.
And, the example of retirement schemes, the CAP has a provision
for a retirement scheme which the UK has not taken up; there is
a very specific example where we have chosen to opt out of an
option that Europe provides.
93. What part has the currency situation played
in the decline in farm incomes? The pound is strong, the euro
is weak, it is down about 20 or 30 per cent. Can you really run
a Common Agricultural Policy unless you have got a common currency?
The ecu was that, in the sense that it was a basket in which we
were a weighted element; the euro is not. Therefore, the euro
fluctuates against the pound and farm incomes fluctuate accordingly.
What part has that played in the decline in farm incomes?
(Mr Course) As far as the UK is concerned, very direct;
we are very directly disadvantaged against the other Member States,
to whom the supposedly common support system applies. It is absolutely
direct. We all know, the 20 or 30 per cent devaluation, relative
to sterling, has reduced our support prices, as well as output
prices that are priced in dollar terms, on the world markets.
It is a very direct relationship.
94. Have you any idea why we allowed ourselves
to be conned into accepting the euro as the comparator, rather
than a common currency, for a Common Agricultural Policy?
(Mr Course) If you are asking the question why—
95. Why did we accept it?
(Mr Course) Why do we not have agri-monetary compensation,
to enable UK farmers to—
96. I am asking why we accepted this system
of pricing, in the euro common currency, rather than the ecu?
(Mr Course) I would suggest that it is a political
view rather than an industry view. Clearly, from the agriculture
industry, if we were able to have our subsidy payments paid to
us in real buying power terms, relative to the rest of Europe,
that would be a more level playing-field, to use a sort of phrase,
than what we have currently, where we are disadvantaged to the
tune of 20 or 30 per cent, or to the tune of almost 100 per cent,
against Germany, as an example.
97. Okay; effectively, we were conned? We were.
(Mr Course) You have a political view. I am saying—
98. The consequences of accepting this have
been bad for agriculture; but let me move on, because I am sure
the Chairman will want me to. Given that many farms have other
sources of income, how concerned should we really be about declining
farm incomes; the Department estimates that between half and three-quarters
of farms have other sources of income?
(Mr Course) I will not dominate too much, because
I must let my other colleagues give a view, but what I believe
is, at the present time, we have to look at the agriculture industry.
Because, on the one hand, we must look at what society wants,
in terms of public goods and environmental goods; we should not
have, I suggest, an agriculture industry that relies on a heavy
degree of subsidy from a range of individuals who happen to have
other incomes, or have other wealth, to support the agriculture
industry. In my view, that is one of the fallacies of what we
have had in the past. I think what we will see, as a result of
a freer market, is a separation of property ownership and farm
management and management of resources. And I think what we should
have is a support system that enables those risk-taking business
people who want to engage in farming as a business to generate
a sensible return on capital, 10, 15, 20 per cent, whatever is
a respectable return. Whereas, those who choose to invest in property
ownership and are happy to accept 1 or 2 per cent, I think it
is a real fallacy to think that the agriculture industry should
be propped up by a small number of wealthy individuals, who are
happy to accept 0, 1 or 2 per cent return on their capital, for
other reasons, which largely is what we have in parts of the country
at the present time, to counter your extremely important question.
(Professor Alliston) Can I comment further on that.
I think, if you do not have a profitable agriculture, there are
many things that go wrong. The first is that you do not get people
coming into the industry; and that, to us, is a very serious problem.
Secondly, if you do not have enough wealth in the industry as
a whole then many of the things that we take for granted in the
rural environment just do not happen. And I think you have got
Professor McInerney coming behind us; he will tell you, I am sure,
that there are about £250 million worth of things that happen
out there in the countryside each year that farmers do, for which
they are not directly compensated, and, if you do not have a profitable
agriculture, that sort of thing just will not happen. And so you
will get large areas that are not being farmed, you will get an
industry that is stagnating, because young people are not coming
into it; do not misunderstand me, some of the older people are
the most efficient people. And I think one of the issues that
perhaps we did not emphasise was, where you get, within an enterprise,
variation in benchmarking characteristics, sometimes it is just
the skill of the operator and enthusiasm of the operator, whatever
age they are, that makes them outstanding entrepreneurs.
(Mr Ansell) Can I make just one further point, about
small farms. The number of small farms is increasing, the number
of large farms is increasing, it is the farms in the middle ground
that we are losing; and those small farms are propped up entirely
by their non-farm income. And whether or not that should be a
serious part of the consideration, in the future design of agricultural
policy, I think, is questionable.
Mr Lepper
99. You have mentioned retirement schemes, as
part of the process of restructuring; could you say just a little
bit more about the age profile of the industry at the moment,
and how you see that changing over the years?
(Professor Alliston) The age profile is very old,
something in the late 50s is the average age; and it is not unique
to the UK, that, the age profile in agriculture around the world
is old. And maybe that is a function, as well, of the fact that
world agricultural prices, in our view, are too low. But, in terms
of how it has gone, it is progressively getting older all the
time; and whilst there are young people coming in at the bottom
there are more people staying in the industry because they have
not got an exit strategy.
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