Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


Memorandum submitted by Dr James V.H. Jones

IMPLEMENTATION OF THE CAP REFORM IN THE UK

IMPLEMENTATION OF CAP REFORM

  1.  DEFRA have adopted a good approach which combines inclusiveness with practicality. They have consulted at each stage and use small groups of stakeholder representatives to work though specific problems. The implementation strategy adopted by DEFRA with respect to England has been well considered and timely. The consultation preceded before the agreement of the legal text. But in practical terms this made little difference as the final version was not all that markedly different from the proposed draft that was available in July and it was available before the end of the consultation period.

  2.  The formation of the three working streams with the GANNT charts showing the sequence of expected actions for each one was shared with stakeholders at an early stage. All this has given a sense of at least a well programmed and timely start to what is bound to be a difficult process. But already the working groups face difficulties in keeping to the schedule.

    i.  The draft legal text was not agreed until 26 September when it was assumed, or at least hoped, that this would have been completed in July.

    ii.  The consultation on regionalisation options has exposed a rift on the major question of whether to pay the Single Farm Payment based on historic entitlement or average payments on an area basis. This has now become yet more complex and no less divisive as a result of offering "hybrid options".

    iii.  There are additional problems faced by sectors that are out of step have not reached even the first stage of the reform process yet. It is apparent that the dairy sector changes could create very large and potentially damaging restructuring effects. This is because there will be little or no time for it to adjust to the influence of converting price support into a coupled compensation payment before this in turn is decoupled. Therefore two separate consultations have started on the dairy options and the sugar sector. But in the case of the sugar sector the options are not even clear from the EU. So it is several steps behind dairy.

  3.  The working groups are having to proceed without the benefit of knowing the outcome of major political decisions emerging from the consultation process. This has been made more difficult by the complexity of the options, the lack of data and impact research and the lack of consensus on both the payment basis and the prospects for the unreformed sectors. If this was not enough cross-compliance and horizontal issues also offer plenty of similar scope.

  So there is a clear danger that what has been tackled as proactively as possible from an organisational point of view in order to issue guidance to farmers and stakeholders in a timely way is going to end up with compressed deadlines and slippage.

  4.  But my impression as an attendee at almost monthly meetings from September 2002 until last June and as a circulation list member since then, is that DEFRA have worked hard to be as on much top of this difficult challenge as possible. They have also approached it in an inclusive way with industry stakeholders. Despite this however there have been two aspects of the process so far which the industry and DEFRA might have handled better in my view.

    i.  We did not always put our negotiators in the best position to win the concessions the UK wanted by being reactive rather than proactive.

    ii.  We have lacked both raw data and research on which to base really major questions such as the prospective level of payment on the regional average (ie flat rate) basis.

NEGOTIATIONS

  5.  It seems to me that the art of successfully negotiating a framework for CAP implementation that suits the UK relies on knowing what we want and then communicating with other Member States to form alliances to achieve the support necessary to get it included. There are instances where our negotiators have not always had all the communication and industry consensus that they might have wanted to give them sufficient priority when forming these alliances. Let me give a couple of examples.

  6.  We have been keen to put the case of agri-environment scheme holders not being disadvantaged by historic entitlement basis for SFP. The RICS made a major issue of this in the stakeholders meetings, in our representations to DEFRA and to Commission officials when we visited Brussels. The point was accepted by DEFRA and in part the issue is addressed in the new legislation.

  7.  The issue on how to resolve historic entitlement for those who changed occupation during the reference period has had a less positive outcome. Industry consensus was hurriedly achieved in May but too close to the difficult negotiations for the Commission to want to make any changes at that stage. It remains potentially difficult. Maybe if that consensus had been arrived at earlier the outcome would have been better.

DATA AND RESEARCH

  8.  DEFRA did commission some simple research into the effects of the Commission's original proposals. But otherwise given the importance of decoupling effects and converting payments to flat rate there has been relatively little to go on in assessing the impact. This lack of detailed consideration has been a major difficulty for the RICS who have sought to adopt views that are in the public interest but without sufficient information. DEFRA only produced some basic figures to indicate the impact of flat rate options on about 23rd September. These were different to those produced by some others and myself and were really too late in the consultation period. (I have appended a paper I wrote for the RICS that attempts to resolve the discrepancies and a letter to the Farmers' Weekly which illustrate the context of what I am referring to here.)

Implementation impact (taking account of options adopted by other Member States)

  9.  There is no doubt that the package as whole is likely to cut agricultural production from the biggest sectors in UK agriculture. The extent of the effect will be conditioned by price levels which are in turn affected by supply and demand conditions in the region, the UK, Europe and ultimately the world as well as exchange rates.

  10.  The removal of the attachment of production conditions means that farmers can be expected to respond by treating the direct payments as a separate income source. Whether they will or not depends on their attitude of mind and that cannot always be predicted by economic logic. The DEFRA commissioned studies mostly used either farm planning models for a few "typical" farm types based on linear programming or just simple observations based on farm accounting data. None of these attempted to model on case study examples how specific issues such as soil type, tenancy arrangements, family circumstances, off farm income and non-farm income opportunities might affect the response in each case. Interviews conducted by a Masters degree student for her dissertation this summer gave some evidence that in practice individual or localised factors have set some farmers on a course that cannot really be altered by MTR or at least only exaggerates effects that were already established by the agricultural recession.

  11.  I have already made some impact predictions as a contributor to the GFA-RACE commissioned work evaluating the potential impact of CAP reform on the environment. I have summarised some conclusions here that seem logical even if they are not all based on research.

ARABLE

  12.  A greater concentration on winter wheat rather than other cereals and a reduction in break crops (including peas and beans despite the coupled supplementary payment). A retreat of production from marginal land including that which is steep, in small and awkwardly shaped fields, on poor draining land and in high rainfall areas. This retreat is partly as a result of decoupling and partly as a result of cross-compliance conditions such as those governing tillage on slopes. However we may expect to see production advance into areas which are in rotational grass (possibly currently in dairying) but are otherwise suitable for cropping and possibly part of the sugar beet area once sugar sector specific support is removed.

BEEF

  13.  Production is likely to fall substantially:

    i.  The high level of direct payment on suckler cows (both in absolute terms and relative to sheep) makes this enterprise particularly vulnerable.

    ii.  The majority of Member States are looking to maintain at least some coupled support for beef and the UK market is quite heavily dependent on imports already so the prospects of beef prices rising to compensate look poor.

    iii.  The supply of calves from the dairy herd is also likely to fall as the industry responds to pressure to restructure resulting in fewer animals entering the beef fattening chain.

    iv.  The scope to improve efficiency is constrained by cross-compliance conditions and the sensitivity to labour costs.

  14.  High value production biased towards UK sourcing, native breeds' etc. will survive. Low cost production probably achieved largely through economies of scale may also prove viable in the new production climate. But traditional small to medium scale production seems hard to support other than if cross subsidised by agri-environment schemes.

SHEEP

  15.  Obviously the decoupling of subsidy will reinforce the downward trend in the national sheep flock. But prospects for a positive price response on a European scale are better than beef given the relatively large influence that the UK has on supply and assuming also that the Irish decide to decouple sheep premium payments (as they appear likely to do). In any event the contribution of the headage payment to the enterprise gross profit margin is less than with suckler beef. So the impact of removal should be less.

DAIRY

  16.  Dairy farmers who quit now will be forfeiting the possibility of getting the coupled Dairy Premium payment in the short term and decoupled Single Farm Payment in the longer term. It is likely that this is now arresting the decline in the number of dairy farmers despite the economic pressures on the sector. Once decoupling takes place there will be no incentive to remain in dairying other than what can be earned from (principally) the sale of milk. Reduction in the support price and conversion into payment makes the likelihood of staying in production progressively less. Delaying decoupling arrests the exodus only to make it more dramatic when it does occur. This seems to me to make early decoupling the favoured option. But until decoupling takes place supply reduction and restructuring responses will be muted.

  17.  The prospects of the industry responding to a shortfall in supply with higher prices are especially dependent on what the processing sector does. The liquid consumption market is not easily penetrated by milk from outside the UK due to transport costs, logistics and probably also consumer preference. It seems to me that there is no such cushion for the processing sector. The demand pressure has been little enough to result in market prices riding at little above the Intervention Milk Price Equivalent in recent years (see graph below). Instinctively I feel a reduction in the intervention price will still form the base for what the processing sector will pay and thus will not give a chance for supply reduction to challenge the liquid milk consumers to pay more.


  18.  Pressure for efficiency gains will be intense and I see the survivors as being herds that can achieve the maximum value of milk net of all feed costs per £100 of labour costs. This might be based on scale efficiencies of cows per man, but managers of large herds tend to be expensive men and I still feel that low cost and simple systems based on family labour might do just as well. It will militate against herd sizes below 100 and those with the lowest yields. Price is bound to be more responsive to seasonality as production gets further concentrated on the West and out of the South and East.

UNSUPPORTED SECTORS

  19.  There is bound to be at least some movement towards unsupported sectors such as pigs and poultry. The operation of the negative list (should it apply) will have an important effect in restricting the move into fruit and vegetables. But the unsupported sectors have already had a lot of restructuring born of severe income pressure. It is more likely that the existing producers will use the opportunity to expand rather than the farmers from the supported sectors starting up in these very competitive enterprises.

CROSS-SECTORAL EFFECTS

  20.

    i.  There will be a strong temptation for older farmers to reduce to a one-man system buying in contract services but farming in a simple and extensive way whilst essentially living off the Single Farm Payment. Conversely there may be less incentive for young farmers to stay in the business unless it can diversify.

    ii.  Investment in farming infra-structure—dairy parlours, grain stores etc. will seem more risky when justified against returns which are not directly underpinned by the CAP any more. So payback periods will have to be shorter to remain viable or attractive.

    iii.  Cross-compliance conditions seem likely to bear down hardest on those that are in production rather than those who are effectively out of it.

    iv.  Agri-environment payments will no longer need to compete with production linked subsidies creating a greater incentive to enter schemes (unless payment rates are reduced accordingly).

    v.  Production activities will not compete as effectively with non-farm or off farm activities. So there is likely to be or will be more part-time farming and more diversification into non-farm enterprises. The Exeter University baseline study on diversification (for DEFRA) already shows the pattern—more farms involved, a bigger percentage of their income, a greater number of activities per farm etc. These trends should be markedly accelerated and accentuated by the CAP reform.

Progress on implementation of the proposals of the Policy Commission on the Future of Farming and Food and how this meshes with CAP reform

  21.  The Commission seemed to take little account of the prospects for CAP reform in their report other than to support the kind of radical solution that is now going to take place. In my view that was an important lacuna. Had the EU Commission's original proposals been accepted it would have completely cut across the funding source for much of what the Curry Commission wished to implement. The Curry Commission might argue that the final shape of the reform now merely opens the door wider to acceptance of their proposals. That is largely true. But it might not have worked out that way and the report does not account for some of the very powerful effects there are likely be created in accommodating the changes.

  22.  As a result I feel the Commission might revisit their conclusions once the final shape of the implementation of the CAP reform is better known. However most of the Curry Commission's messages (such as reconnecting with consumers, improving efficiency and competitiveness, providing a greater environmental role, pluri-activity on farms and a broader approach) are just made even more appropriate and important. CAP reform should also improve the uptake by farmers.

  (The views expressed are those of the author and are not necessarily those of either the Royal Agricultural College or the Royal Institution of Chartered Surveyors)

Dr James V H Jones Head of Farm Management at the Royal Agricultural College, Cirencester and an RICS Countryside Policy Panel member and stakeholder representative.

December 2003


 
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