Supplementary memorandum submitted by Jim Reed, Chief Executive of UKASTA (A29(b))
STABILISATION FUNDS AND THEIR PLACE IN A DIFFERENT FARM SUPPORT POLICY
INTRODUCTION
1. This memorandum needs to be read in conjunction with the submission I put forward on 20 November 2001 to the Policy Commission on Farming and Food, entitled "A Possible Role for Equalisation Funds and Stabilisation funds". A copy of that paper was forwarded to the Select Committee as part of our earlier written evidence.
2. Equalisation funds were relevant to 1970s thinking about agricultural and horticultural producer groups, and particularly to those products with no or very light EU market support regimes, eg, cauliflowers. They are not suited to an age in which markets are (and should be) being freed up from bureaucratic constraints, and are not further considered here.
3. The basic mechanics of stabilisation funds were described in the 20 November submission to the Curry Commission. The rest of this memorandum suggests how such funds might sit with other policy instruments and objectives, and whether they would be attractive to producers on a collaborative basis compared to other commercial instruments such as insurance for the output of individual farms.
THE ECONOMIC CASE
4. It should be recognised at once that some products which are essentially homogeneous, such as milk or wheat, are much more obvious candidates for the stabilisation fund approach than others. However, even for the better candidate products, there is no doubt that British producers would be attracted to join stabilisation funds (which would be entirely voluntary) only if:
— were sure their financial contributions were secure;
— EU launch aid made it highly likely that, over the first few years, funds would pay out more than they took in, unless market prices were exceptionally good and consistently exceeded fund target prices;
— the EU and individual fund rules ensured that a producer whose output exceeded the standard quality could receive a reward for this from the fund (as well as from the market).
5. Careful drafting of the rules would achieve these aims, but only if generous launch aid were available for those funds meeting the criteria. It is a moot point whether such aid should come exclusively from central CAP expenditure, or perhaps on a 50/50 split with national funding. Either way, the creation of stabilisation funds would need to be coupled with a move away from CAP internal market supports and external trade protection. It follows that the concept of a launch aid might need to be cleared with the WTO as a mechanism enabling a permanent reduction in subsidies and protection.
THE FARM AND FOOD INDUSTRY PERSPECTIVE
6. There is already ample evidence that globalisation of the food market will lead to more intense competition both in farm commodities and in finished foodstuffs. Combined with a progressive reduction in CAP external trade barriers, this seems likely to result in much greater volatility in UK farm output prices than have been experienced for more than 60 years. Assuming that the cost of key inputs such as land and finance will not fall dramatically in the short to medium term, and that direct CAP support for output will be reduced, many more British farmers will become much more vulnerable to year-to-year fluctuations in their market returns.
7. Politicians might question whether slowing the rationalisation and adjustment process at farm level by introducing measures such as stabilisation funds is sensible. But the food industry, a very important employer in the UK, is likely to maintain current processing and marketing activities here rather than abroad only if it can continue to source a large part of its raw materials from within the UK and at competitive (world) prices.
THE COUNTRYSIDE ENVIRONMENT
8. Farmers' representatives and a wide variety of other commentators maintain that the first requirement for a healthy and attractive countryside is a healthy and profitable farming industry. There are also many who advocate switching CAP funding to schemes aimed at environmental outputs rather than production supports. We ourselves have supported the Curry Report's idea of a broad and shallow environmental scheme.
9. However, designing such a scheme as the backbone of a new rural policy is anything but easy. Nor is it obvious that the majority of commercial farmers will be enabled to remain in the food production business by environmental payments substituting progressively for output-related aids, since earning the new payments will involve the diversion of some resources away from the food production business.
10. Stabilisation funds alone can do little to resolve such dilemmas. But by providing help for farm incomes in difficult market situations, and by the very fact of requiring a multi-year commitment from farmers to the food production side of their businesses, they should help to discourage commercial farmers from simply giving up in hard times. They should therefore be seen as a useful transitional tool encouraging continuity in the countryside and thus having a positive impact on the take-up of environmental schemes and especially the broad and shallow one.
THE INSURANCE ALTERNATIVE
11. Insurance against crop failure and other farm income disasters may be available, but it has not hitherto proven attractive in UK conditions. That may change in the future, and the Select Committee has also received evidence about the possibility of farmers insuring against sudden declines in market returns due to price volatility. It is clear that such insurance instruments could, if taken up very widely, offer individual farmers an effective alternative to the stabilisation fund concept.
12. The Select Committee might be attracted to the insurance option as a more "free market" solution to the price volatility problem. But it seems unimaginable that CAP reform and the transitional measures to accomplish it will include any shift of funds into private insurance. Stabilisation funds are a collaborative solution and could be far more attractive to politicians across Europe looking for mechanisms which could be seen as supportive of farmers in general, and not too different from systems employed in the past. Thus, while the two solutions are by no means mutually exclusive, stabilisation funds could be a significant feature in a reformed CAP, with insurance as a commercial option for those individuals who want it.
CONCLUSION
13. Stabilisation funds as part of a package of changes in rural policy could support the transition to freer food markets and a farmed environment satisfying public aspirations, while helping to maintain a significant commercial food production and processing industry. Their effective launch would depend on the evolution of clear rules and substantial launch-funding on a one-off basis. Their longer-term life would depend on their commercial effectiveness and consequent attractiveness to producers, which is hard to predict, but their role in assisting transition could be extremely valuable.
22 May 2002
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