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1. At the end of FDF's appearance before the Commons Environment, Food and Rural Affairs Committee on 1 May, the Chairman asked the Federation to supply further information on the extent to which CAP compensation payments are trade distorting (Question 866 refers). The Committee secretariat accordingly requested "a short note on `distortiveness'" by Wednesday 22 May.
2. This results from a query on a point made in FDF's written submission to the Committee, submitted in December 2001. Under the section covering cereals and oilseeds, FDF stated:
"However FDF members consider that compensation payments remain acceptable as these are not trade distorting".
3. Since the introduction of compensation ("blue box") payments as part of earlier CAP reform, the EU's imports of grain have increased and exports at zero refund have also increased. Since such payments effectively allowed the EU to reduce intervention price support—a very trade distorting form of support—and import duties, they have facilitated this freeing up of trade. FDF welcomes this process and had this comparison in mind when making the above comment.
4. However, compensation payments or direct payments are more trade distorting than fully decoupled payments because the former continue to require a farmer to produce certain commodities to receive them. In some circumstances a farmer can get similar payments not to produce—to set aside his land—but generally all farmers cannot get such payments for all their land. So compensation payments keep more farmers producing grain than there otherwise would be. They are not seriously trade distorting in that when the EU does not produce enough grain—as this year—it imports to fulfill its requirements. In good years it exports and—now that intervention prices at least for wheat have come down far enough—it can easily export without export refunds.
5. At a basic level, any payments outside a market mechanism have the potential to distort a market in some way. The problem with such distortion is that it provides a false basis on which to make long-term investment decisions as it is subject to political whim. Even payments which are fully decoupled from production and which are paid without any requirement on the part of the farmer to produce may be distorting if they are significant. From the point of view of a farmer in a developing country with no government support at all, payments to farmers in developed countries which are of the order of $350 billion dollars a year, even if they were all in the "green box" and therefore nominally non-trade distorting, clearly must affect the market. They help keep farmers in developed countries in business.
If nothing else, if the payments are somehow tied to the land without even a requirement to produce they are capitalised in land values—making one of the inputs of production more expensive and reducing the competitiveness of those farmers on a global basis, other things being equal. The risk is that these farmers then demand ever more subsidies over time—as perhaps can be seen in the recent US farm bill. Conversely, if such payments are tied to incomes they remove one element of risk for those farmers and leave them freer to take riskier market decisions about what to produce and be less dedicated to serving the needs of their customers.
6. For food manufacturers, the competitiveness and customer-focus of UK (EU) farmers are key elements in retaining production in the UK (EU) over the longer term. Given the amount of distortion in the world agricultural production system, FDF believes that the current opportunity to use the multilateral round of trade negotiations agreed at Doha should be seized to discipline and reduce, for everbody, the size and production linkages of all kinds of direct payments, in addition to the priority work on reducing the really trade distorting market price support mechanisms and quantitative restraints.
7. FDF would argue that, now that the intervention price change has mostly been achieved, it is time to look again at the system. One of the anomalies in the system is that having compensation payments at the same level for grain and oilseeds while retaining considerable tariff protection, some intervention support and some export refund support for grain, definitely advantages grain production over oilseed production. This is despite the Community's deficit in oilseeds. Compensation payments have therefore fulfilled their purpose and they should be phased out.
8. At the same time, in order to facilitate the move to ever less distorting forms of support, we believe that other ("Pillar II") forms of payments targeted at achieving society's goals in the countryside should be phased in. Such payments with clear, non-production-linked, goals offer the next stage in the way forward. The opportunity should also be used to take a broader approach to arable land that does not discriminate against the production of any commodity at farm level. Such an approach is already being put forward by the EC Commission as part of its proposals for small farmers in the EU Enlargement candidate countries. With compensation payments at a minimum the requirement to produce should be removed, and degressivity in these payments would also be welcome. FDF firmly believes that, with enlargement imminent key decisions need to be taken now so as not to entrench, for the foreseeable future, a system that drains competitiveness and customer focus from UK (EU) farmers over time.
May 2002
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