Memorandum submitted by the National Farmers' Union of England and Wales (NFU) (A34)
1. The NFU of England and Wales thanks the Select Committee for its invitation to present its views on its Enquiry into the Future of UK Agriculture. We have tried to respond to the consultation as succinctly as possible, concentrating on the three questions which were posed.
THE PROSPECTS FOR PRODUCTION SUBSIDIES AND QUOTAS, AGAINST THE BACKDROP OF WORLD TRADE LIBERALISATION AND THE MID-TERM REVIEW OF THE AGENDA 2000 REFORM OF THE CAP
2. As long ago as 1994 the NFU identified in its document "Real Choices" that external and internal pressures would at some point require further important changes in the CAP, which had then only recently (1992) undergone its first radical reform.
We identified these pressures as:
The push for further liberalisation of agricultural trade within the WTO.
Enlargement of the European Union.
3. The conclusion we reached at the time was that the reduction of our ability to subsidise exports, and the gradual opening of our domestic market to foreign competition, would progressively limit our ability to operate a higher consumer price policy in the European Union. At some point the EU would be faced with a real choice between limiting domestic production (supply management) or further dismantling of the CAP, compensated by direct support decoupled from production. The NFU's view was that this choice was not immediate, but when it came we would prefer the second option.
4. Subsequent events have not significantly changed our analysis. The recent launch of the WTO Doha Development Round confirms the continuing pressure for greater liberalisation of world trade. Enlargement of the European Union has not proceeded smoothly, but it still appears likely that some, and perhaps a large number of countries will accede around the middle of the decade. There has been a further Reform of the CAP in the 1999 with Agenda 2000 which confirmed the movement towards lower price support and more direct payments. One trend which has emerged in recent years is the pressure from society in a growing number of countries against support linked to production and in favour of broader rural development measures.
5. Although these pressures will ultimately require a further significant reform of the CAP; there is some argument about when this is likely to occur. The view of the British Government appears to be that a reform is both desirable and achievable in the short term. This is not entirely the view of the NFU.
6. As far as the desirability of an early reform is concerned, the NFU has long recognised that it is inevitable that there will be further changes to the CAP. However, it has to be recognised that the type of changes which HMG have promotedfurther price-support reductions, perhaps compensated by direct payments, a phasing down of existing direct payments and a shift from production-related support to rural development measuresare bound to lead to a further sharp reduction in farm incomes, at least in the short-term. It would be a good thing if the government would admit this more honestly. Given the current state of the farming economy in the UK, which is not only in deep recession but in a comparatively worse state than that in other EU countries, largely as a result of the significant overvaluation of Sterling, it should not be surprising that farmers are not anxious for early changes.
7. Another argument used by the government for early reform is that if decisions can be taken in the next few years we would avoid the complication which is likely to arise when enlargement adds more Ministers around the table of the Council of Ministers. There is some force in this, but when we recall the lasting resentment which is still felt by the Fisheries Regime and the Budgetary arrangements, both agreed in 1972 before the UK was a member, we question the wisdom of this approach.
8. As far as the achievability of reform, our view is that the pressures which are acting for change will not become acute in the near future. To take these in turn:
The political balance in Europe is evolving, but slowly. During Agenda 2000, the so-called London Group (UK, Italy, Sweden, Denmark) could barely muster a blocking minority. The position is very fluid at the moment, and it may be that Portugal, and perhaps Germany will join the reformers' camp. But that is uncertain, and it seems very improbable that this group will have anything like a qualified majority.
The Doha Round is committed to substantial reductions in domestic support and protection and reductions, with a view to elimination, of export subsidies. But actual negotiations will not start before 2003, with a view to conclusion by 2005 at the earliest. On the model of the Uruguay Round, commitments would be then be phased in over six years.
Enlargement of the European Union will probably start around the middle of the decade. The actual budgetary cost will depend on the precise terms of entry, which have yet to be negotiated in agriculture. But it is often forgotten that there is a substantial sum in the CAP budget until 2006 which is ring-fenced for enlargement. This was set on the assumption that enlargement would take place before 2004. Moreover, it is very possible that countries will not all enter at once, and there may be transition periods.
In the past, budgetary pressure has often been a stimulus for change, but since Agenda 2000 CAP spending has remained comfortably within budget. Admittedly this has been facilitated by the low value of the euro against the $. If the two currencies were to move towards parity, then under current arrangements the CAP expenditure would rise and the budget problems could result.
9. It has often been remarked that the CAP is the result of numerous past compromises between different countries and interest groups. These are now embedded and difficult to unpick, except under the force of urgent external pressure. In view of the analysis above, everything points, in our view, to reform taking place in 2005/06 and not before.
10. On the precise question of the future of production subsidies and quotas the NFU's views are this:
We believe that production subsidies are not sustainable in the long term. We reaffirm our 1994 position that there should be a progressive decoupling of subsidies from production. We recognise that there will be pressure to make subsidies degressive and acknowledge that this would be a better option than the so-called "renationalisation" of support. However, we envisage this happening over a period, and we do not believe it will start immediately. Different sectors are at different stages in the process and this must be taken into account.
The issue of switching support from production subsidies to rural development at a national level through modulation, we have dealt with under your third question. We have opposed and remain fundamentally opposed to the principle of modulation.
On quotas, the NFU has prepared a statement of its views which has not yet been endorsed by the Council, its governing body. This states "while the NFU recognises that output quotas are not sustainable, they should not be removed until the industry structure is ready and only after an appropriate phase-out period following a clear signal that they are to be ended".
HOW CAN BETTER STEWARDSHIP OF AGRICULTURAL LAND BE PROMOTED?
11. The issue of the sustainability of agriculture has become of critical importance, DEFRA has placed sustainability (for the whole economy, not just farming) at the heart of its aims and objectives.
12. The NFU endorses the definition of sustainability promoted by the United Nations, that is to say that it must be considered as an environmental, economic and social concept. The NFU very firmly believes that with very few exceptions modern agriculture is environmentally sustainable. Most indicators demonstrate that the environmental performance is good, and improving. By contrast, the economic position is not sustainable: farming has been a severe recession for five years, and the position is deteriorating.
13. Against this background, the NFU believes that there is a serious danger that too much attention could be directed at issues such as land stewardship, important though these are, and not enough paid to economic issues.
14. Briefly, better stewardship can be promoted by:
At the most negative level, it is of course important that actual pollution or environmental degradation is prevented by regulation. Such regulation should always be objectively based and proportionate, something which is regrettably too often not the case.
By the promotion of best practice, for example the LINK programme on integrated crop management.
By better direction of public-funded research, for example, developing new chemicals which have lower environmental impacts and allowing the delisting of older, more stable and damaging chemicals.
There is an element of cross-compliance in most direct payments (the payments are conditional on following food agricultural practice).
Farm Assurance Schemes are vital in informing the consumer that food has been produced in a way which is safe and protects the environment and animal welfare.
There are numerous voluntary initiatives aimed at improving the quality of land stewardship, for example the NFU's "Waterwise" initiative and the joint NFU/English Nature biodiversity action plan.
The NFU has always firmly supported programmes in Environmentally Sensitive Areas, which encourage farmers to preserve the features of these important sites by following particular agricultural practices.
The NFU also supports the Countryside Stewardship Schemes which are more generally available to farmers. These schemes could be expanded somewhat, but it would not be the NFU's priority to see an immediate further large diversion of resources into this area.
THE OPPORTUNITIES AND DIFFICULTIES FACED BY AGRICULTURE AS A RESULT OF POSSIBLE REDUCTIONS IN PRODUCTION SUBSIDIES
15. For the reasons explained above, the NFU does not advocate an immediate reduction in production subsidies and we do not expect this to happen.
16. That said, there are undoubtedly examples of agricultural support payments which distort the market and where changes would probably have a generally beneficial effect. For example, the current sheep support system probably does encourage some farmers to keep sheep for the subsidy rather than for the market, and the resulting production, when it is not of the quantity or quality desired by the consumer, can have a detrimental impact on the market as a whole.
17. The NFU believes that a recovery in the fortunes of British agriculture can come only through the market. We see market opportunities in four broad categories:
Value added products, and more involvement in the food chain
New products and markets
18. A reduction in production subsidies will be likely to make commodity production more difficult in future. However, there could be opportunities in the other categories. We would hope that within Rural Development programmes that significant sums of money could be spent on projects to improve marketing structures, and this should help farmers to obtain better returns within the food chain. We strongly advocate that as part of any changes to the CAP there should be stronger and more firmly based measures to promote new uses for agricultural crops, particularly renewable energy and raw materials. Finally, a major part of the Rural Development Programme will be for payments to farmers for services which society values, but for which there is no conventional market. These we regard as payments for services, not subsidies.
19. The British government can unilaterally reduce production subsidies and increase spending on rural development through so-called modulation. The US already has a modulation programme which began at 2.5 per cent in 2001, rising to 4.5 per cent by 2006. The NFU is completely opposed to any increase in these levels before 2006. The reasons for this are:
As explained above, British agriculture is largely environmentally sustainable, but not economically sustainable. Against that background further modulation would be wrong.
Direct production payments do not have a cost to farmers whereas agro-environmental payments (which is what extra modulation would be spent on), as currently arranged, have a substantial element of cost (at least 80 per cent of the value) to farmers. For this reason, modulation is bound to further reduce farm incomes, even if there is extra British government spending.
It is highly unlikely that most other European governments will introduce modulation, or, if they do, will opt for rates as high as in the UK. So further modulation will discriminate against British farmers, whose income position is already uniquely bad within the European Union.
Modulation is a very arbitrary instrument which affects some sectors and not others and will involve considerable redistribution. This is already causing division and resentment in British agriculture at the level of 2.5 per cent modulation. At higher levels of modulation this resentment can only increase.
14 December 2001