House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Seventeenth Report

2 Impact of accession on agriculture in the New Member States

Agricultural situation pre-accession

9. Of the ten new members, attention has tended to focus on the eight former Central and Eastern European Countries (CEECs), due to their relative size, and not on Malta or Cyprus. However, even within the former communist countries of Central and Eastern Europe, agricultural structures and production potential vary greatly between nations.

10. The diversity of agricultural sectors in the CEECs was reflected in the four acceding countries that we chose as case studies: Poland, Hungary, Slovenia and Slovakia. Agriculture in Poland, for example, is characterised by considerable fragmentation. Almost 20% of its population is engaged in agriculture and around half its farmers are classified as subsistence or semi-subsistence producers.[6] Although Poland has some large farms, mainly to the north and west of the country, 56% of farms are less than five hectares in size. In contrast, when we visited Hungary, we were struck by the commercial potential of its agricultural economy, which is one of the few in the CEECs to have a positive trade balance.

11. The process of transition from centrally planned to market economies caused agricultural output to decline in most of the CEECs in the early 1990s.[7] However, Slovenia bucked this trend, with its large private agricultural sector being cushioned by a policy of high producer prices so that it suffered least from structural reform.[8] In our other case study country, Slovakia, the size and importance of agriculture to the national economy has decreased significantly since the collapse of communism.[9]

Policies pre-accession

12. During socialist times, agriculture in most CEECs was heavily supported, with prices, production and trade all being determined by direct state control. When, in the first years of transition, these instruments of state control were dismantled and replaced by taxes, export subsidies and intervention measures, support levels declined sharply. Support levels also varied greatly, as administrations inexperienced in operating market economies reacted to unexpected policy effects with sudden and frequent policy changes.[10]

13. Since the mid-1990s, in the run-up to accession, the CEECs have progressively harmonised their agricultural policies with the CAP, although overall support levels have remained much lower than in the EU-15.[11] According to the Organisation for Economic Co-operation and Development's measure, Producer Support Estimate (PSE),[12] Slovenia was the only accession state to be matching the levels of farm support in the EU prior to enlargement.[13]

Strengths

Low input costs

14. Currently, the main advantages for producers in the CEECs are lower costs of land, labour and some other raw materials.[14] Wage costs are a fraction of EU-15 rates,[15] which could give the CEECs a competitive advantage in carrying out labour-intensive activities, such as horticulture and dairy.[16] However, in written evidence, Professor Sir John Marsh warns against exaggerating the importance of this possible advantage, on the basis that "the modern food industry is capital intensive" and "increasingly, the skill of the labour force is more important than the wage paid".[17] Also, as labour markets are opened up and skilled farm workers become increasingly free to move, the costs of labour will rise in the CEECs and start to become comparable with the rest of Europe.[18] Furthermore, land prices in the NMS can be expected to increase over time, as support payments are capitalised into land values, and temporary arrangements which prevent or constrain outside investment lapse.[19]

Niche products

15. Whilst evidence suggests it is unlikely that the NMS will flood the EU market with food, they do have some products that could be very competitive, particularly in the early stages after accession. Pre-accession analysis carried out by the National Farmers' Union showed that UK farmers producing oilseeds, fruits, vegetable and poultry would face increased competition as a result of enlargement.[20] Organic production, particularly organic meat, could also be a great area of potential in the CEECs.[21] When questioned in oral evidence, officials from Slovenia and Slovakia both pointed to their countries' wine as promising product lines.[22]

Weaknesses

Structural disadvantages

16. The fragmentation of farm structures in the CEECs is a commonly cited weakness. The extent of this fragmentation depends largely on whether, during the communist era, the country's agriculture was collectivised under central planning and, if it was, how it went about re-establishing private property rights during the period of transition to democracy. The two major exceptions to the model of collectivisation under communism were Poland and Slovenia, both of which retained a dominant private sector in agriculture. Poland has nonetheless been left with a highly fragmented farming sector, which is seen as being a long-term structural handicap.

17. A general feature of those countries that had a predominantly collectivised agriculture in the pre-transition era is that the nature of land holdings tends to be 'bipolar'—that is, it is characterised by having, on one hand, a large number of very small subsistence or semi-subsistence holdings, with low productivity, and, on the other, some very large holdings that have been created out of collective or state farms.[23] Experts predict that, in the next few years, the number of the smallest farms will decrease and agricultural land will concentrate in even larger holdings.[24] Over-employment in agriculture has served a useful social function during the period of transition. However, with accession likely to bring increased competition, the management of the required structural adjustment is one of the major challenges facing the NMS.

18. While land and labour are abundantly available to agriculture in the CEECs, capital is not. Capital investment in farming is currently low and supply of agricultural credit is often lacking, which could hinder farmers' attempts to modernise their businesses. However, accession is likely to lead to an improved market for rural credit, which could make it cheaper for producers to acquire the necessary capital.[25]

19. Agricultural trade between the EU and the accession states had been largely liberalised prior to enlargement. Up to now, there has been no flood of cheap imports from the NMS.[26] While the New Member States struggle with their current weaknesses, including structural fragmentation and a lack of capital investment, we consider that they are unlikely to be in a position to undermine agricultural markets in the EU.

Phased-in payments

20. After enlargement, the most notable difference in treatment for producers in the NMS has been that their direct payments under the CAP will be phased in over a 10-year period. The starting point for 2004 is 25% of the full rate received by farmers in the EU-15, with parity being reached only in 2013, after a series of incremental adjustments. Under the terms of the accession deal, agreed in Copenhagen in 2002, governments in the NMS have the opportunity to top up these rates by a further 30%, using money drawn mostly from national funds.[27] This inequality of treatment between the EU-15 and the NMS has caused considerable resentment, with reference being made to 'second class' membership of the EU.[28] However those were the terms upon which they joined the EU.

21. In response, the European Commission argues that higher levels of direct payments would be undesirable because they would consolidate existing farm structures in a period of rapid restructuring. For semi-subsistence farms in particular, high payments would remove incentives for the structural change that is required to make the NMS competitive in the single market.[29]

Ability to meet safety standards

22. Another potential weakness identified pre-accession was the ability of the NMS to meet the safety standards required in the EU. In November 2003, the European Commission expressed serious doubts over the readiness of food plants in several acceding countries, in its report on preparations for membership.[30] Failure to meet food safety and veterinary standards would have stopped the NMS from exporting produce on to the single market and prevented them from exploiting any competitive advantage for the products affected.[31]

23. However, in April 2004, just prior to membership, all the accession states were officially given the go-ahead to sell food freely on the EU market.[32] No 'safeguards'—generalised bans on specific types of produce—were imposed on any Member States, but some transitional measures were still necessary: temporary derogations were granted to more than a thousand food establishments which otherwise would have been closed down, allowing them to operate only on their national market. Under tightly controlled transitional measures, products from these establishments must be specially marked and cannot enter the single market.[33]

24. The ability of the NMS to implement the transitional agri-food measures is of critical importance, as the discovery of sub-standard food in circulation on the single market would bring the whole system into disrepute. Lax safety standards in the New Member States could undermine consumer confidence in all food products across the whole of the EU. We recommend that the UK Government use all its influence to ensure food safety standards continue to be upheld.

25. During the inquiry, questions were raised regarding the ability of the NMS to enforce European regulations relating to genetically modified (GM) foodstuffs. In particular, fears were expressed that enlargement could allow unlabelled GM produce to enter the EU through the 'back door', as some of the acceding countries did not possess the sophisticated testing facilities that are required to detect GM.[34] We believe that the UK Government should press the Commission to address the adequacy of the accession countries' internal scrutiny systems. It is essential that the GM status of exports from the NMS can be assured.

Opportunities

Economic and trade benefits

26. For the NMS, the economic opportunities of membership of an enlarged EU are obvious. Access to a market of 454 million consumers, free of tariff restrictions, export quotas or trade barriers, is not the only attraction for their farmers. Prospects of greater stability in agricultural markets, rural development funds and CAP direct payments, albeit initially at a lower level, encourage farmers from the NMS to believe they should be better off within the EU.

27. Economic analysis suggests this optimism is well-founded. Professor Tarditi told us that extending the present EU-15 farm policy to the NMS would almost triple their present agricultural support, generating an increase of over 30% in revenues and doubling farm incomes.[35] A European Commission study points to a similarly positive outcome for the agricultural sector as a whole in the NMS. It predicts that by 2010, sector income, as measured against gross value added in 2002, should have risen by around 35%. This strong development in farm income is largely attributed to the phasing-in of direct payments, improvements in the efficiency of production and the effect of rural development measures.[36]

Rural development funds

28. In the lead up to accession, the CEECs were already benefiting from EU-funded rural development schemes, via SAPARD (Special Accession Programme for Agriculture and Rural Development).[37] Further targeted rural development programmes are important in helping the NMS to overcome their weaknesses, particularly with regard to the modernisation and restructuring of their agriculture sectors. Rural development policies also offer the best opportunity to diversify and generate non-farm income. As we saw on our visit to Poland and Hungary, organic farming and rural tourism represent two of the more promising possibilities.

Threats

Competition

29. In terms of competition, producers in the NMS feel at a disadvantage to the rest of the EU, due to their comparatively lower level of direct payments.[38] This perception of being in an unfavourable position is compounded by the fact that they are now competing with larger, better capitalised and more market-savvy rivals in western Europe.[39]

Environmental impacts

30. One of the concerns about enlargement is the potential for it to cause negative impacts on the environment. Evidence from the Royal Society for the Protection of Birds suggests that the changes resulting from the application of the CAP in the NMS could threaten birds and other wildlife, through either agricultural intensification or abandonment.[40] These concerns have been subsequently reinforced by a report from the European Environment Agency.[41]

31. During our inquiry, fears were also expressed regarding the detrimental consequences of large multinationals setting up industrial-scale animal production units in the NMS.[42] The world's largest pork producer, Smithfield Foods, has already established an intensive pig unit in western Poland. With each pig producing up to ten times as much waste as an average human, the high concentration of animals on one farm is seen as being a significant pollution risk.[43]

32. Ministry officials in Poland and Hungary considered that they had done well, to date, in aligning their environmental legislation with the requirements of EU membership. Poland and Hungary referred to the administrative challenge of meeting the environmental standards of the EU. This was an area in which Hungary, in particular, felt that longer-standing EU Member States, including the UK, could usefully provide advice based on their existing knowledge and experience.

Conclusions

33. The evidence we received on the agricultural implications for the NMS was of course received prior to enlargement. A few months on, it is still too early to determine what the full impact of accession will be. It does seem, however, that fears of markets being immediately flooded by products from the NMS were not grounded in fact. We consider that the agricultural potential of the NMS will not be realised until its farming sector is restructured; such restructuring will take some years to complete. The environmental concerns, which came from official as well as other sources, deserve serious attention. We also believe the UK Government should explore ways in which it can use its existing knowledge and experience to assist the NMS in achieving their environmental targets.

6 Ev 101-102 Back

7 Ev 24 Back

8 Ev 24; European Commission, Agricultural Situation in the Candidate Countries: Country Report on Slovenia, (Brussels, 2002), p 7 Back

9 Q 47 Back

10 Network of Independent Agricultural Experts in the CEE Candidate Countries, The future of rural areas in the CEE New Member States, (Halle, 2004), p 158 Back

11 Ev 24; Q 8 Back

12 Producer Support Estimate (PSE) is the annual monetary transfer from consumers and taxpayers to agricultural producers, measured at the farm-gate level, arising from policy measures that support agriculture. Back

13 Ev 24 Back

14 Ev 127 Back

15 In 2000, the hourly labour costs in the EU-15 of €22.21, compared to rates in Latvia and Lithuania of €2.42 and €2.71 respectively. ("EU enlargement: The new EU of 25 compared to EU15", Eurostat news release 36/2004, 11 March 2004) Back