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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