House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Ninth Report

CHAPTER 1 - INTRODUCTION

1. In 2000, the Government published its Action Plan for Farming.[1] The Plan acknowledged that "there is a crisis in British agriculture", and set out the short-term and long-term causes of the crisis: unfavourable exchange rates, the legacy of bovine spongiform encephalopathy (BSE), and low international commodity prices.[2] Since then the crisis has not gone away, but instead has got worse. In present circumstances the Euro is not a common currency across Europe. The gap between sterling and the Euro seriously reduces returns to British farmers at a time when world commodity prices are declining. Consumer confidence in beef has been affected across Europe by the discovery of further cases of BSE on the Continent. On top of those difficulties the foot and mouth outbreak of 2001 caused severe financial hardship for many livestock farmers, and shook the confidence of the agricultural sector as a whole.

2. Difficulties in the marketplace have been matched by uncertainties about the policy framework within which the industry operates. Many of the reforms proposed in Agenda 2000, intended principally to adjust for the impact of future enlargement of the European Union, were vetoed at Berlin in 1999, so reform was modest. Those reforms agreed at Berlin are subject to review this year,[3] and proposals for further change have been tabled by the European Commission. The process of European Union enlargement itself raises questions about competition between farmers in the existing member states and their counterparts in eastern Europe. Over-arching all such considerations are the negotiations about trade begun at the Fourth Ministerial Meeting of the World Trade Organisation in November 2001, which will address liberalising trade in agricultural products.[4]

3. In short, farming is in flux. Such a state presents an opportunity to consider the future direction of the industry. The shock of foot and mouth disease, in particular, has stimulated many in the United Kingdom to look again at the future of farming. A 'vision' for agriculture, together with proposals intended to make the vision a reality, was presented by the Policy Commission on the Future of Farming and Food established by the Government which reported in January 2002.[5] Part of our purpose in this inquiry has been to look at the Commission's proposals. We have also looked at other plans and suggestions for the future made by the Government and others in recent years. But we have also gone further, looking for more radical ways to address the problems and maximise the opportunities of United Kingdom agriculture.

Conduct of our Inquiry

4. In the past our predecessor Agriculture Committee undertook a number of short inquiries, or 'one-off' discussions with Ministers, on specific aspects of the crisis in agriculture and the Government's responses to it.[6] On this occasion we decided that current circumstances warranted a much longer, more wide-ranging examination of the marketplace and policy environment in which agriculture operates. We announced our inquiry in October 2001, inviting evidence which addressed our wide-ranging terms of reference.

Our terms of reference

The Committee's terms of reference were to consider:

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;

how better stewardship of agricultural land can be promoted; and

the opportunities and difficulties faced by agriculture as a result of possible reductions in production subsidies.[7]

5. We received memoranda from more than sixty organisations and held eleven evidence sessions where we considered a wide array of views. We took evidence from farmers, but we wanted to hear from others, and so took evidence from representatives of the United Kingdom Government, and of the German Government and the European Commission. We heard from organisations representing agricultural suppliers, processors, retailers, traders and caterers. We took evidence from environmentalists and academics. In addition we undertook visits to Brussels, New Zealand and East Anglia in connection with our inquiry.

6. Throughout our inquiry we were advised by Professor Sir John Marsh CBE, formerly of the University of Reading, and Professor Ken Thomson of the University of Aberdeen. We also benefited from hearing the informal views of Lord Williamson of Horton, former Secretary-General of the European Commission. Individual Members spoke privately to many others, including farmers, retailers and wholesalers, during the course of the inquiry. We are grateful to all those who gave us formal evidence or who talked to us more informally: all helped us to shape our thoughts.

The experience of New Zealand

In the years prior to 1984, the New Zealand economy faced a number of structural difficulties. It is argued that the heavily protected manufacturing sector had become inefficient, and the public sector bloated. In agriculture increasingly large subsidies had been put in place to encourage exports in the face of difficulties including greater international competition, high levels of inflation and the accession of the United Kingdom to the European Community in 1972, which resulted in New Zealand's entry to its most significant (and guaranteed) market being severely restricted.

In 1959-60 53.0 per cent of all New Zealand's outputs went to the United Kingdom; by 1998-99 that proportion had fallen to 6.2 per cent.

This transformation and the diversification to new markets were well under way by the mid-1970s, but then to ease the problems of transition at a time of low agricultural prices a range of a range of loans, incentives, tax dispensations and cash payments were introduced. Of particular note were sheep subsidies, payments to encourage livestock farmers to purchase more animals, and subsidies for fertiliser, as well as loans to develop marginal land.

By 1984 the result was that there were nearly 70 million sheep on farms in New Zealand, and in total more than 21 million hectares of land was in occupation.[8] But the problems of poor rates of economic growth, high domestic inflation, declining terms of trade, a rising current account deficit and soaring government borrowing forced the Labour Government elected in 1984 to implement a radical programme of economic reform.

The Government announced a 20 per cent devaluation of the currency and the removal of controls over interest rates. It subsequently pursued policies aimed at controlling inflation, and promoting economic growth through enhanced competitiveness in the private sector and improved efficiency in the public sector: in short through liberalisation, deregulation, floating the exchange rate, and a programme of privatisation.

The Government sought to make the agricultural sector more efficient by eliminating protection and price support both for outputs and inputs. The Government removed assistance rapidly from agriculture. Most subsidies were stopped immediately. Farmers were also required to pay for services previously paid for by the Government, such as inspection and consultancy. In addition more general changes in economic policy, such as the drive to deregulate, affected the sector.

From 1980 to 1984, the Government spent NZ$772 million each year on support for pastoral agriculture, which represented 32.7 per cent of farm incomes. Between 1985 and 1990 the figures were NZ$677 million and 18.7 per cent. By 1996 to 1998 the figure was NZ$115 million (mainly on research and quarantine services), representing 2.3 per cent of farm GDP.

The reforms were not easy: many of those we spoke to in New Zealand commented on the "pain" of transition. The result of reform was a certain degree of streamlining of agriculture and some changes in the structure of the sector. There has been a decline in production of sheep products (sheep numbers fell below 44 million in 2001, a fall of 38 per cent), and in the area of land under occupation (to 16.6 million hectares by 2001, a fall of 21 per cent). At the same time there has been an expansion of cattle products, dairying and forestry. Horticultural production has more than doubled. Farm sizes have increased as smaller units have amalgamated, and the number of farm workers particularly in the livestock sector has fallen. We were also told about severe effects in the agricultural supply industries and in the processing sectors.

Today, 5.5 per cent of the country's gross domestic product is derived from agriculture (compared with approximately 0.7 per cent in the United Kingdom).[9] More importantly, it is a major source of foreign revenue, making up a huge proportion of total export earnings.

In 1960-61, New Zealand's agricultural exports were worth NZ$519 million. This was 92.5 per cent of the country's total foreign earnings. By 1980-81 that proportion had fallen to 62.4 per cent, and by 1998-99 the total agricultural exports of NZ$11,516 million represented 50.9 per cent of the total.

In 1960-61, the agricultural sector made up 14.6 % of New Zealand's total GDP. By 1980-81 that had fallen to 9.4 %, and by 1998-99 to 5.2 %. Growth sectors over the same period included forestry, fishing and manufacturing exports.

It is claimed that "reform of agricultural policy has allowed signals about new products, new markets, innovations, and new technologies to reach those in a position to make important decisions in a changing economy".[10] Certainly we were struck by the business-like approach of the farmers we met, from the sheep farmer who told us about a niche in the market for lamb which he and a handful of colleagues were exploiting on the West Coast of the United States, to the young dairy farmers whose herd was ever-increasing in size. We saw plenty of evidence that farmers were well-connected with their marketplaces - and were free to exploit opportunities as they saw fit.

The situation in New Zealand is not the same as in the United Kingdom. There change was decided domestically - and was forced on the country by severe problems which affected the wider economy, not just agriculture. Tenant farmers, so numerous in Britain, are rarer in New Zealand, and the family farm backed by producer cooperatives has proved to be flexible, responsive and innovative. Population densities in New Zealand in no way compare with those of this country. Agriculture is far more important to the economy there than in the United Kingdom, and so policy is more likely to take account of the needs of the industry. It is worth noting that the recent success of the sector owes much to the "competitive" value of the New Zealand dollar, for example.

Nevertheless, there are lessons to be learned from New Zealand. We consider that they include:

(a) radical change is best carried out quickly, with strong political leadership, and should be accompanied by wider reforms which liberalise the supply-side and marketing areas;

(b) the importance of an approach to co-operation and large scale enterprises which takes into account the need to compete in a global as well as domestic market place;

(c) a 'can-do, will-do' culture, based on enthusiasm for farming, is essential if agriculture is to thrive in a competitive environment; this in turn, depends on a structure where change is seen as a normal part of development, and where there are no institutional bars to such change (for example quotas);

(d) the need for strong Government support for agricultural science, but with leadership from the industry; and

(e)New Zealand has benefited from developing new markets and by being very export focussed.

Above all, that farming take place in an unprotected, liberalised marketplace without traumatic environmental effects. Indeed that farming can flourish in such circumstances.

Our perspective

7. The Government has said that its policy is "to secure an environment in which a competitive and sustainable agricultural industry with a strong market orientation can flourish".[11] We endorse its view. The Common Agricultural Policy has discouraged farmers from taking risks to secure higher added value in new markets, and has distorted the balance within farming itself by setting a disproportionately high price for grains and discouraging types of production to which British climate and conditions are well suited. It has also harmed consumers: the National Farmers' Union spoke of the "higher consumer price policy in the European Union",[12] and the Consumers' Association observed that the CAP "keeps European Union food prices higher than prevailing prices elsewhere".[13] During our inquiry we were told repeatedly that agriculture in the United Kingdom has become disconnected from its market, its activities restricted and distorted by European rules and subsidies, and that it is crying out for a sense of direction.

8. It is worth acknowledging that this analysis is not automatically shared elsewhere in the European Union. Britain's perception stems from a number of factors: the relatively small size of the agricultural sector in the economy; the tradition of supplying cheap food for an essentially urban and industrial population; and the impact of the CAP on Britain's contribution to the European Union budget. In France or Ireland, in contrast, the CAP is seen as a major source of income to the countryside and represents a broad inflow of funds to the national economy. In addition, agricultural exports are important to both countries. For Germany, the CAP was not just part of the 'deal' with France at the heart of the European Union but part of the internal balance within the country between rural and industrial interests within a federal system. Southern European countries have tended to focus on the differences between the heavy supports for temperate products and the supposedly less robust assistance for production of Mediterranean-type foods.

9. Nonetheless, as agriculture is brought within the framework of international trade negotiations, it is evident that production and export subsidies as well as direct payments to farmers - in other words, support for farmers for being farmers - will be reduced over a period of years, even if they do not disappear with the inevitability some have predicted and that export subsidies will ultimately have to go. We strongly welcome that development. The Common Agricultural Policy has, in our view, led to farmers becoming dependent on subsidies, and divorced from the marketplace, especially as the market has become more global. The main lesson of our inquiry is that it is the primary role of farmers to produce food that consumers want, and to do so in a competitive and open marketplace free of production or trade-distorting subsidies, and without undue restrictions on their freedom to operate. We believe that such a situation presents the best way for farmers to reconnect with their market, and to become competitive, profitable and confident. Farmers have a secondary role as land managers, and we acknowledge that continued Government intervention on environmental grounds is likely.

10. The reality, however, is that the United Kingdom will have to fight hard for clear and substantial change to a system which was designed before our entry to the European Union. The record, given that all British political parties have long been committed to fundamental reform of the CAP but that only very modest reforms have been achieved, suggests that the United Kingdom will not be a major contributor to reform. We therefore strongly support moves towards reducing restrictions and cutting subsidies. The more the marketplace for farmers can be liberalised, the better able they will be to respond properly to signals from it, as is already the case for pig, poultry and horticultural producers who currently have no support from a subsidy regime. There will still be a role for some subsidies but these should not be production-related.

11. If changing policy objectives are to be met and funding priorities change, there will undoubtedly be winners and losers, possibly even in the same sector because of differentials in performance.[14] Both the Government and the agricultural industry will have to accept this. If priorities change, new priorities must be tackled. If agriculture is to rely on being competitive in the marketplace, it cannot expect permanent assistance to prevent it from feeling the effect of policy changes. There may, however, be scope for transitional financial support. As a rule, we would expect new policies to be phased in or support for agricultural production to be phased out in a manner that had been announced well in advance of any change. In general we believe that any further assistance would be unnecessary. If, for any reason, adequate notice is not given or new developments cannot be phased in, we believe that the case for short-term degressive transitional aid should be examined. This should not rule out the consideration of a much more radical approach, such as the removal of current production subsidies over a short timescale.

12. In our view, interventions in agricultural markets, whether in the food or non-food sectors, in the future should be made within the following framework:

an assessment of the problem the intervention is addressing should be made, whether or not a short-term problem or structural issue is being tackled should be made clear;

the desired outcome of the intervention should be made known and clear approaches detailed to allow an assessment of the effectiveness of the intervention;

if financial support is made available, clear indications must be given about the length of time for which such support will be available;

there must also be absolute confidence that reform is consistent with our international obligations;

while it is unrealistic to expect every policy instrument to be mirrored elsewhere in the European Union, reform should allow for the international competitive environment within which much of United Kingdom agriculture operates;

any interventions should, as far as possible, be consistent with fostering an entrepreneurial culture - competition for support and rewards for effectiveness are legitimate features of programmes; and

there needs to be an appreciation of the impact on the wider rural economy.

13. We have commented elsewhere on DEFRA's weak management.[15] Involving the Department in the operation of new complicated agrienvironmental schemes may increase the burden on its managerial team. Until DEFRA is better equipped to manage itself, it will not find it easy to take on new responsibilities.

1 An Action Plan for Farming, MAFF, March 2000, see http://www.defra.gov.uk/farm/agendtwo/strategy/action.htm; see also Help for the future - Government unveils strategy for UK agriculture, MAFF Press Release, 30 March 2000, see http://www.defra.gov.uk/news/newsrel/2000/000330h.htm. Back

2 An Action Plan for Farming, p. 1. Back

3 Commissioner Franz Fischler's homepage dealing with the Agenda 2000 Mid-Term Review, see:

http://www.europa.eu.int/comm/commissioners/fischler/a2000_en.htm. Back

4 WTO - agriculture page, see: http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd00_contents_e.htm. Back

5 Policy Commission on the Future of Farming and Food, Farming and food - a sustainable future, see:

http://www.cabinetoffice.gov.uk/farming/pdf/PC%20Report2.pdf. Back

6 See for example Outcome of the CAP Negotiations, HC (1998-99) 442; The Current Crisis in the Livestock Industry, HC (1999-2000) 94; The Implications for UK Agriculture and EU Agricultural Policy of Trade Liberalisation and the WTO Round, HC (1999-2000) 246-I; and UK Pig Industry, HC (2000-01) 32. Back

7 Environment, Food and Rural Affairs Committee Press Notice No. 2, Session 2001-02. Back

8 Situation and Outlook for New Zealand Agriculture and Forestry: September 2001, New Zealand Ministry of Agriculture and Forestry, pp.51 and 52. Back

9 Situation and Outlook for New Zealand Agriculture and Forestry: September 2001, New Zealand Ministry of Agriculture and Forestry, p.57, and Agriculture in the United Kingdom 2001, p.11. Back

10 Reforming EU Farm Policy: Lessons from New Zealand, Institute of Economic Affairs, Occasional Paper 112, p.41. Back