Memorandum submitted by Professor Wyn
Grant, Warwick University (A40)
This paper is limited to some key points on
CAP reform for consideration by the Environment, Food and Rural
Affairs committee of the House of Commons.
Commissioner Fischler has been seeking to dampen
down expectations of what will emerge from this process for some
time. The French Government in particular has also made it clear
that it does not expect anything emerging from the process beyond
what it calls "adjustments". This might mean, for example,
a widely signalled change to the rye intervention regime; some
attempt to reform the sugar regime; further measures on beef.
In other words, the focus would be on the commodity regimes perceived
to be in the greatest difficulty. The dairy sector would be largely
left alone. The most comprehensive measure that is likely to be
agreed on is some form of "modulation", most probably
the "Robin Hood" version which would involve some capping
of CAP payments to larger farmers with the funds released being
diverted to "second pillar" or rural development measures.
A more radical reform would involve some element
of "degressivity", ie, a regular annual reduction in
the real value of payments made under the CAP. It would also require
substantial reform of the dairy sector where there continues to
be structural overcapacity and where the characteristics of the
current regime are undermining the competitiveness of EU dairy
exports in the world market. A recent Court of Auditors report
argued that the subsidy element in milk producers' income has
been increasing and the producer subsidy equivalent for the sector
in the EU is estimated at 54 per cent. However, any significant
reform of this regime is unlikely before 2006. A substantial reform
would involve the phasing out of the current quota system and
an effective lowering of farm gate prices for dairy products (possibly
of the order of 25-30 per cent). This would have serious implications
for smaller scale dairy farmers who would require some form of
A "second-best" reform would be to
permit transfer of quotas between member states that would potentially
be of benefit to larger scale British dairy farmers wishing to
expand. The Commission has always resisted this on the grounds
that it would undermine the basic rules of the quota system. However,
if there is an internal market, should there not be quota transferability?
This provides a further impetus for reform.
This will intensify as the end of 2003 approaches when the "peace
clause", which effectively prevents challenges to the CAP
at the WTO, expires. The Commission's strategy is evidently to
make further concessions on export subsidies, but to defend the
"blue-box" which permits area aids to cereal producers
(and would also shelter similar compensatory payments to the dairy
sector in the future). The Commission likes to claim that the
measures used in the CAP today are less trade distorting than
the policy instruments used in the past. It is true that they
are less directly trade distorting, but substantial payments to
producers, even if partially decoupled from production, are still
likely to encourage them to produce more than they would do in
the absence of the payments.
It is important to note that there are two general
versions of the reform agenda currently in circulation:
One, often advocated by the United
Kingdom, with varying support from Denmark, Sweden and the Netherlands,
seeks to make agriculture more market orientated and internationally
competitive. It is argued that the industry would actually benefit
in the longer run by becoming less subsidy dependent and more
responsive to market signals from consumers. In broad terms,
this might be called the "liberal" approach.
A different agenda is advocated by
the "greens", notably the German agriculture minister,
Frau Künast. This approach advocates less intensive forms
of agriculture, the substantial development of organic agriculture
and more localised servicing of markets. The welfare of farm animals
is an important part of this agenda. It is not particularly interested
in questions of international competitiveness, either of farming
or the food processing industry.
Where these agendas might converge is in an
acceptance that there will have to be a shift away from an agricultural
policy to a rural policy that takes a multi-dimensional approach
to the problems of rural areas.
The Consumers' Association has recently produced
a paper advocating the abolition of the CAP and of the specialist
EU institutions concerned with it such as the Agriculture DG,
the Council of Agriculture Ministers and the Special Agriculture
Committee. It criticises the UK Government for advocating reform
rather than abolition. Any UK Government advocating abolition
would not be seen as credible and would risk alienating other
member states whose support might be required on other issues
where British interests were at stake.
The Consumers' Association makes an interesting
comparison between the cost of a similar basket of food in the
UK and New Zealand. New Zealand has particularly favourable conditions
for certain types of agriculture and it is not surprising that
some products cost less locally. What this type of comparison
fails to take into account is that if the CAP was to be abolished,
many European farmers would go out of business. The world balance
of supply and demand would be significantly affected and prices
of imports into the EU would increase. This would not readily
bring farms back into production as land would have been abandoned,
capital equipment dispersed and farmers would have found other
forms of employment. Of course, the CAP does generally have an
adverse effect on the prices paid by consumers, but its magnitude
is often exaggerated.
Some of the arguments put forward for continuing
agricultural subsidies are of little merit. Food security arguments
are not particularly relevant in modern conditions or should at
least be viewed on a Europe wide basis. It is true that because
of such factors as the impact of the weather, agricultural products
are subject to gluts and shortages and it is difficult to arrive
at a stable equilibrium between supply and demand (this is really
the basis of the separate sub-discipline of agricultural economics).
However, that problem could in principle be dealt with by insurance
or, should that not be feasible, by some kind of stabilisation
fund that would not require the current scale of intervention.
It has proved possible for the potato market to function without
a commodity regime. Much of the money spent on the CAP in any
case does not reach the farmer but is absorbed by various intermediaries,
including bureaucracies. Because of the complexity of the CAP,
transaction costs are high.
However, we do not start with a blank sheet
of paper. The way that policy has developed means that the industry
has become significantly dependent on subsidy. Decisions taken
in Brussels directly impact on planting decisions taken by farmers.
Too sudden or rapid a removal of subsidies would throw an already
weakened industry into chaos.
There has to be a recognition in the industry
(and there is in some quarters) that just because someone's parent
has been a farmer, they cannot be expected to be given state help
to follow in his (or her) footsteps. Leaving aside the issue of
diversification, which is neither possible nor desirable for all
farmers, and is probably approaching saturation point in some
areas, there are two broad models for successful farming:
A high volume approach which seeks
to spread fixed costs over a large number of units of production
and keeps variable costs under strict control, monitoring inputs
carefully in terms of cost effectiveness. A large dairy farm would
be a good example.
A more quality oriented, niche marketing
approach, perhaps involving cooperation with other farmers, processors
or retailers to market high value added products. An example that
comes to mind is a farm I visited in Herefordshire that is producing
sheep's milk. Some of it is frozen and sold direct to consumers
(allergy sufferers) at a premium price. Some of it is used to
produce high quality (low fat content) ice cream and manufactured
and sold in a retail outlet in a town visited by tourists.
There is much to be said for replacing existing
subsidies, at least in part, by a "farm bond" as advocated
by Professor Swinbank and his team at Reading. This could be used
in a number of ways:
To generate an income for the farmer
to compensate for the loss of subsidies.
For further capital investment in
existing activities to make them more competitive.
To develop new activities.
Simply going as we have been will not help farmers
or farming in the long run. We need new approaches that are, however,
sensitive to the concerns of the rural community.
18 December 2001