Select Committee on Environment, Food and Rural Affairs Written Evidence


Memorandum submitted by Sir John Marsh

AGRICULTURE AND EU ENLARGEMENT

1.  BACKGROUND

    (a)  In 2004 10 new members will join the European Union. A further three countries, Bulgaria, Romania and Turkey have started the process of negotiation in order that they may join at a later date. In this note this group of applicants are described as "second wave countries". The note itself is concerned with the whole process of enlargement, leading to an EU of 28 member countries.

    (b)  Accession requires new members to apply within their own frontiers the rules and decisions already agreed within the existing EU, the "acquis". Much of the process of negotiation is to ensure that they are able to do this from the point of entry. Where particular requirements are not fully met, derogations from the rules may be applied but these are temporary and the process of assimilation to the full acquis has to be completed within an agreed time.

    (c)  Agriculture played a central role in the establishment of the original European Economic Community. It mattered because it represented a relatively large share of employment and economic activity, because memories of war and post war food shortages were still vivid and because each of the member countries had intervened in agriculture, but in differing ways and to different degrees.

    (d)  The Common Agricultural Policy was devised to ensure that agricultural trade could take place within the EEC and that a common set of regulations would apply to external trade. This remains its core function but the way in which it is realised has changed during the life of the Community.

    (e)  In the 1960s the CAP reflected the dominant concerns of the day: food supplies and the standard of living of farm families. Since the 1960s these have been overtaken by anxieties about the impact of farming on the environment, about food safety and about the impact of surpluses on the budget and trade relations. Thus the acceding member countries are required to apply the CAP but the CAP itself is changing. The most recent of these changes, negotiated in 2003 and here referred to as the Fischler Reforms, have taken place since the agreements for the applicant countries to join were completed. The new members will have to adopt the new arrangements where these differ from those they had agreed.

    (f)  A much larger share of economic activity among the new members is agriculture than most existing EU members. The price of food weighs more heavily in the cost of living of their populations. The economic and social impact of the CAP is therefore a major issue relating to membership of the EU. It is also of concern for the existing Union. This enlargement, especially when the "second wave" countries are included, represents a very large increase in the agricultural sector of the EU and the potential impact of the CAP on the cost of the CAP, on world trade and on the environment.

2.  AGRICULTURAL PRODUCTION IN THE ACCEDING COUNTRIES

    (a)  The 10 countries who are to join in 2004 will add some 30% to the Utilised Agricultural Area of the EU. Their output in 2001 amounted to only 10% of the output of the existing members. They will, however, add some 58% to the numbers of people engaged in agriculture and related activities. When the second wave joins, the UAA will be 70% greater than at present and the agricultural population reach almost two and a half times the present level. Many of these additional numbers are very small scale farmers in Poland and, among the "second wave", in Romania and Turkey. They operate on a semi-subsistence basis far from the market oriented farming systems that prevail in the existing Community. Their productivity is relatively low and hence their ability to earn incomes equivalent to those enjoyed elsewhere in the EU is weak.

    (b)  Annex Table 1 demonstrates the wide diversity of resource use and production within the acceding member countries. It does not show the huge variations in production conditions, in capital equipment and in structural organisation that also co-exist among the countries now joining the EU. These characteristics will pose a further challenge to the CAP which has hitherto been dominated by the relatively homogenous concerns of North West Europe.

    (c)  Annex Table 2 looks more closely at the place of agriculture in the economies of the countries concerned. Again there are big differences between the existing members and the new entrants. Among the 10, Agriculture's share of GDP is roughly twice that of the existing EU whilst the share of food in household expenditure is almost double that of consumers in the Community. Trade in agricultural goods is a larger share of their total trade and six of the new entrants are net importers. For the acceding countries accession will ultimately open up markets in the 15. It will also mean that their industries will have to compete within the EU at the price level protected by the CAP.

    (d)  Annex Table 3 shows that, if production continued at current levels, enlargement to 25 members would increase cereal production by some 25%, milk by 18% and oil crops by 19%. The second wave countries would, on the same assumption of continued current levels of production add an even larger amount to current production, especially of cereals, fruit and oil crops.

3.  THE PROSPECTS FOR THE AGRICULTURE OF THE ACCEDING COUNTRIES IN AN ENLARGED EU

    (a)  Simple addition of production levels is an unsatisfactory approach to understanding the impact of enlargement on the new member countries and the existing Community. What actually happens will be greatly influenced by the overall economic performance of their economies, by the CAP, and by the economic characteristics of the agri-food sector within the countries concerned. This is discussed in the following paragraphs.

    (b)  The original CAP supported commodity prices. The reformed CAP, especially since the introduction of the Single Farm Payment, allows the market to play a much larger role in determining prices. Markets respond to consumer purchasing behaviour but the prices received at each stage are greatly influenced by the structure of the market itself.

    (c)  Consumers buy food rather than farm output. The value added after the farm gate greatly exceeds that added on the farm. This includes, transport, storage and first stage processing, manufacturing, distribution and retailing. Europe has an elaborate food chain that provides a year round choice of fresh foods, processed and oven ready foods and supplies a growing catering sector. The success of businesses within the chain depends heavily upon the infra-structure of which they make use. This includes not only investment in "food industry" plant and equipment, but the road and telecommunication systems, the availability of relevant skills and the advertisement and marketing activities characteristic of mass marketing.

    (d)  The agri-food sector of the EU 15 is highly developed. It offers a continued stream of innovative products designed to appeal to a population that is relatively affluent but time poor. Within the acceding countries the food industry lagged under central planning. It has since been seeking to catch up, often with the aid of investment from the West. This will be encouraged by the accession but the food sector still lacks the infrastructure of the current EU. Affluent citizens in the new members form a target for EU food companies. But there remain many people who are relatively poor and for whom the convenience and time saving offered by modern food products may be less important than the price at which they can be bought.

    (e)  If we assume that real incomes in the new member countries will rise, the prospects for investment in the food sector will improve but if local food producers are to access the higher value added market they will need to compete in the highly sophisticated markets of the EU 15. If they do not their own citizens are likely to be serviced by imports from existing members.

    (f)  Their main current advantages are lower labour and raw material costs. However, the importance of these should not be exaggerated. The modern food industry is capital intensive. Increasingly the skill of the labour force is more important than the wage paid. Raw material food forms a relatively small and declining part of the total costs of putting food products on the shelves of supermarkets. For this to happen the food businesses must not only reach the regulatory standards required within the EU, itself a costly process, but must become as innovative and "fashion conscious" as those who currently supply the markets of the European Union.

    (g)  There is no reason to believe that this cannot be achieved in the long run but the process is likely to be protracted. At the farm level large scale structural adjustment is needed to secure economies of scale and increase productivity. The growth of infra-structure will depend critically upon the overall economic performance of the economies concerned. Investment will be encouraged by certainty of access to the entire enlarged EU market, but will need assurances about the availability of skilled manpower. The rate of progress is likely to be critically influenced by the need for cultural change from the legacy of central planning and the predominantly peasant agriculture of the small farm sector.

    (h)  The implication of this discussion is that, at the outset, there is likely to be scope for increased EU investment in the food industries of the East and a market for more EU food products among the new member countries. As their economies grow, the underlying advantages that some of the new members have in terms of agricultural resources seem likely to assert themselves. The trade flow may well be reversed as their developing agri-food sector targets and captures markets elsewhere in the EU. For that to happen, however, the market must be authentically competitive and the CAP must be non-discriminatory. Thus the process of transition and the ultimate shape of the CAP are of central importance to the success of agriculture in the new member countries.

4.  THE ARRANGEMENTS FOR ACCESSION

    (a)  In preparation for enlargement the EU has supported a variety of schemes under several programmes. In the period 2006 these include the PHARE programme, established in 1989, ISPA and SAPARD, both established in 1999. These programmes have sought to assist the new member countries develop the necessary legal provisions and institutional structures to cope with the application of EU policies including the CAP.

    (b)  Negotiations for entry were divided into some 31 chapters of which the largest was agriculture. The goal was to allow the new members to apply the policy as it stood on the date they entered. In June 2003 the Commission reported that negotiations were complete with Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. They continued with Bulgaria and Romania.

    (c)  The agreements reached involved arrangements for the opening of frontiers to agricultural trade, the provision of a range of rural developments measures, to be co-financed (the EU covering 80% of the cost), special measures relating to semi-subsistence farms and the introduction of direct payments. The rural development measures are intended to promote structural change. The direct payments correspond to those received by existing members of the EU.

    (d)  Membership of the EU involves opening frontiers to trade between all member countries. However, trade in agricultural products is regulated to safeguard animal and plant health and food safety. There remain concerns about the ability of several of the new member countries to ensure that the standards required within the Union can be maintained. As a result, at the date of accession products will move freely from existing to new member countries but trade in the opposite direction may still be restricted by phytosanitary and veterinary requirements. Until their standards reach the level required the new members will be unable to exploit any competitive advantage they have for the products affected.

    (e)  The MacSharry reforms of the CAP and those resulting from the Agenda 2000 decisions, embodied direct payments as a form of compensation for lower prices. Payments were based on past levels of production of the specific commodities affected by the reform. They had the beneficial result of reducing the price level for EU consumers and the unit cost of export subsidies needed to sell goods abroad. By the end of the 1990's direct payments had become the largest single element in budgetary support for farmers in the EU.

    (f)  Introducing direct payments in the applicant member countries presented several problems. The historical justification did not exist for farmers who had not received the higher prices paid in the EU. Payments of equivalent amounts would create windfall gains for some farmers and an provide incentive to produce in order to qualify for their receipt. The payment system required a record of the fields involved, their area and history used by the Integrated Arable Control Scheme (IACS) in existing member countries. This did not exist and there were insufficient administrative structures to develop one within many if not all the acceding countries.

    (g)  Agreements were reached relating to rural development programmes and reference quantities for quotas and base areas for calculating direct payments These agreements provided that direct payments should be phased in, starting at 25% in 2004 and eventually leading to parity with the then applicable EU levels in 2013. Member states who had already given support to their farmers in anticipation of entry were allowed to top up these payments one of two schemes. First to use up to 30% of the rural development funds provided by the EU together with national funds to raise direct payments to levels growing from 55% to 65% of EU levels by 2006. Beyond 2006 any topping up would have to be wholly financed by national governments. Second, national governments could top up payments to the level the farmer would have receive on a product by product basis before accession.

    (h)  The total amount of direct payments for each country would be expressed as a national envelope that could, for a limited period, be paid on an area basis, the Single Area Payment Scheme (SAPS), rather than related to the past production of each farmer. However, when this interim arrangement ceased farmers would be required to complete an IACS statement and payments would be related to their production of the commodities concerned.

    (i)  The veterinary and phytosanitary concerns of existing EU members made this a key area of negotiation. Agreement was been reached on these issues although transitional arrangements that mean that products of member countries that do not meet the required standard cannot be marketed to other countries of the EU. Those products that do meet the standard will be freely saleable within the entire enlarged EU.

    (j)  The Commission already monitors progress towards accession within applicant countries. It will continue to be responsible for ensuring that the arrangements agreed are fully carried out after accession.

5.  THE IMPLEMENTATION OF THE 2003 PACKAGE OF REFORMS FOR THE CAP (THE FISCHLER REFORMS) HAS RADICALLY CHANGED THE LOGIC OF SUPPORT FOR AGRICULTURE AS WELL AS THE WAY IN WHICH IT IS DELIVERED WITHIN THE EU

    (a)  For most products future support is not to relate to current production but will be delivered in the form of a Single Farm Payment (SFP) fixed in relation to past production. The amount paid will not be affected by future levels of output, thus it is "decoupled" from production. However, to receive the payment farmers have to continue to farm and to comply with a number of conditions known as cross compliance. These are designed to ensure that agricultural land is kept in good condition; in effect it is still "coupled" to continued farming activity.

    (b)  Individual member states have some flexibility in applying the new arrangements. In particular they have to decide whether direct payments are to be paid to farmers on the a basis of historic production upon which or distributed regionally on an area basis.

    (c)  The decoupled Single Farm Payment (SFP) changed the basis upon which the acceding countries had negotiated entry. However, the terms of the accession agreements requires countries to apply the "then applicable CAP". They will therefore have to apply the reformed policy. To cope with this the Council agreed in October 2003 to adapt the Act of Accession. The changes allow for:

1.  New direct payments covering the dairy sector, energy crops, fruit and nuts.

2.  The continuation of the SAPS arrangements as a means of distribution direct payments, rather than the introduction of the Single Farm Payment based on historic levels of production on individual farms.

3.  Modifications in the arrangements for national topping up of direct payments in the new member countries. In effect national topping up arrangements relating to particular commodities would be merged into a national envelope representing the difference between payments due under SAPS and the topping up margin (+30% or to the pre-accession level of support). Payments would be granted on a per hectare basis for the entire area eligible under SAPS.

4.  The introduction of cross compliance by the replacement of the "meeting Community standards" conditions of the Act of Accession with the requirement that applies to all recipients of the Single Farm Payment, that they must meet EU cross compliance standards.

6.  THE IMPACT OF THE REFORMED CAP

(a)  The application of the Fischler reforms in the new member countries is to be welcomed

1.  It avoids the need for the new members to establish commodity related payments based on the earlier CAP regimes. By enacting these changes now investments will have to be based on the market rather than commodity policy configuration.

2.  The system based on area payments is administratively less complicated and will reduce bureaucratic costs for countries that still have large numbers of very small farms. It should also reduce the risk of fraud.

3.  The requirement that "standards" must be applied to all recipients of direct payments, avoids the earlier impression of discriminatory standards applying to the new member countries.

4.  Price reductions for milk and the prospect of further liberalisation as part of a WTO negotiated outcome, will reduce the cost of the policy to consumers. For people who receive incomes well below the EU average this is of especial importance.

(b)  Short to medium term considerations concerning the impact of CAP reform within the new member countrie

1.  Attaining acceptable phytosanitary and veterinary standards is critical if the new member countries are to develop trade with the established EU. Progress seems to be uneven among the applicants.

2.  The SAPS system of direct payments is administratively simple but it has the effect of providing resources for farmers who were not producers of products upon which entitlements to payments are based. Given the high proportion of fixed cost characteristic of many sorts of farming it is likely that it will encourage more of these producers to remain in business. This may impede structural reform.

3.  The "topping up" provisions benefit farmers in some acceding countries. If they are distributed as SAPS payments, farmers who did not produce the commodities on which they were based will gain. Compared with producers of the same products in existing members that do not regionalise payments, farmers in the new members will be at a disadvantage.

4.  The rural development provisions are not directly affected by the changes in the CAP commodity policies but the switch to decoupled payments will change the pattern of incentives so far as future investment is concerned. The SAPS payment should have a less distorting impact on future investment policies by farmers than support based on current production.

(c)  The impact of CAP reform within the new member countries—longer term consideration

1.  Direct payments originated as compensation for price cuts. If they are to continue they will need to find fresh justification. Within the existing EU this has focused on the environment. Within an EU with many more very small and relatively poor farmers it is likely to be based more strongly on social considerations. This could affect the distribution of CAP payments among member countries.

2.  The new member countries represent a substantial addition to the agricultural resources of the EU. In the longer term, given equivalent access to capital and markets they will approximate to productivity levels elsewhere in the Community. To realise this potential the EU will need to be competitive within global markets. This will not be attainable if the CAP seeks to solve social and political problems of adjustment by protection.

3.  The major market constraint on full exploitation of these resources is the under-developed state of the agri-food sector infrastructure. To strengthen the ability of the food and agricultural sector to compete, more training, more research and development activity, the creation of institutional structures that are market rather than regulatory oriented and the inflow of external resources to accelerate progress are crucial.

4.  The competitive advantage of low wage costs and lower land prices will provide a short run benefit for sectors, such as fruit picking. However, as incomes rise and cheap labour becomes scarce and land prices reflect overall prosperity, the uptake of improved technologies is likely to determine the success of food chain businesses enabling them to respond rapidly to market opportunities. Entrepreneurial energy, cultural acceptance of change and a constructive regulatory environment will determine how large an agricultural industry will survive in the new members as in the rest of the EU.

  7.  The enlargement of the European Union presents a major challenge to the Common Agricultural Policy. The Fischler Reforms have made a major step forward in liberating the support system from commodity production. However, the future for farming lies not in continued support from the state but in becoming a fully competitive user of the resources it needs. Farming has to see itself as the first stage of the food chain that provides food for sophisticated consumers. At the same time it has to respond to social pressures for a more sustainable and sensitive use of the natural environment. To secure this development is needed in the whole rural economy. This is a wealth creating challenge that an enlarged Community must tackle together and articulate through a CAP for the 21st Century.

Sir John Marsh

January 2004

Statistical Annex

Table 1a

BASIC ECONOMIC DATA FOR EU 15
Utilised Agricultural Area 000 ha Employment in Agriculture 000s % in Employed Civilian PopulationOutput in Agricultural Activities M Eur
20012001 20012001
Belgique/België1,390 561.47,359
Danmark2,69496 3.59,098
Deutschland17,038956 2.644,490
Elláda3,575627 1611,655
España25,596 1,0256.535,585
France27,856964 4.165,072
Ireland4,458120 75,879
Italia15,3551,113 5.243,388
Luxembourg1283 1.5263
Nederland1,933238 3.120,744
Österreich3,375 2155.85,751
Portugal3,838645 12.92,844
Suomi/Finland2,216140 5.83,976
Sverige3,154114 2.64,563
United Kingdom15,799 3901.424,119
EU totals128,3056,701 4.2287,886


Table 1b

BASIC ECONOMIC DATA FOR 10 ACCEDING COUNTRIES
Czech Republic4,280 2284.93,232
Estonia89143 7.1422
Cyprus14314 4.9
Latvia2,485145 15.1562
Lithuania3,487245 16.51,181
Hungary5,853235 6.15,660
Malta123 2.1158
Poland18,2462,736 19.214,965
Slovenia48690 9.91006
Slovakia244132 6.31,522
CC1038,3273,871 13.2


Table 1c

BASIC ECONOMIC DATA FOR THE THREE SECOND WAVE COUNTRIES

Bulgaria5,498286 9.73,705
Romania14,8974,801 44.410,707
Turkey30,8837,217 35.4
Second wave51,27812,304



Table 2a

AGRICULTURE IN THE ECONOMY OF THE EU 15

Aggregate Share of GDP % 2001 Aggregate share of imports % 2001 Aggregate share of exports % 2001 Percentage Household Expenditure on Food 2000
Belgique/België1.1 6.75.716.8
Danmark2.38.1 20.517.4
Deutschland0.94.8 2.915.6
Elláda6.75.4 21.821.4
España3.68.2 10.418.5
France2.24.7 7.717.6
Ireland2.53.8 7.717.2
Italia2.46.4 5.116.9
Luxembourg0.61.2 1.2
Nederland2.29.9 16.410.5
Österreich1.34.1 4.315.6
Portugal2.411.8 8.622.5
Suomi/Finland0.93.3 3.616.1
Sverige0.64.1 3.116.7
United Kingdom0.65.7 5.113.9
EU totals1.76 6.116.1


Table 2b

AGRICULTURE IN THE ECONOMY OF THE ACCEDING 10

Aggregate Share of GDP % Aggregate Share of Imports %Aggregate Share of Exports % Percentage Household Expenditure on Food
Czech Republic1.75.4 429.7
Estonia3.211.8 7.734
Cyprus3.916.1 34.825.2
Latvia313 6.634.3
Lithuania3.19.3 11.839
Hungary3.83.5 8.227
Malta2.210.4 2.726.2
Poland3.16.7 7.928.8
Slovenia27 4.131.5
Slovakia1.96.4 4.118.9
CC103.19 9.228.8


Table 2c

AGRICULTURE IN THE ECONOMY OF THE SECOND WAVE THREE
Bulgaria11.531.8
Romania12.98.1 4.139.3
Turkey

Second wave

2.813.2


Table 3a

PRODUCTION IN THE ACCEDING 10


Cereals
Mt
Fruit
Primary
Production
Mt
Oil Crops
Primary
Mt
Meat total
Mt
Milk TotalBeef and
Veal
Wine
Czech Republic6,777,208 512,221313,056874,595 2,740,018105,91648,000
Estonia543,33528,000 25,11559,091620,716 13,2442,000
Cyprus138,000248,930 4,375101,044209,900 3,90044,400
Hungary11,682,2001,329,200 412,3911,131,7002,291,200 48,000380,000
Malta11,8006,538 019,26646,993 1,636630
Latvia1,044,00067,306 13,22163,126813,643 16,0430
Lithuania2,539,100163,400 42,298184,1381,815,000 64,5005,500
Poland26,833,1982,996,866 385,7122,789,80012,201,100 315,0000
Slovakia3,153,359186,774 150,693275,8951,222,508 37,54431,595
Slovenia495,923227,026 663170,990650,000 42,20044,000
CC1053,218,1235,766,261 1,347,5245,669,64522,611,078 647,983556,125


Table 3b

PRODUCTION IN THE SECOND WAVE 3

Cereals MtFruit Primary Production Mt Oil Crops Primary MtMeat total Mt Milk TotalBeef andVeal Wine
Bulgaria7,400,007688,400 226,620498,0001,568,700 61600200,000
Romania14,066,7332,163,100 763,826911,6004,750,000 145,000500,000
Turkey31,940,18010,995,550 936,2071,314,0849,495,550 350,00028,234
Second wave53,406,920 13,847,0501,926,6532,723,684 15,814,250556,600728,234


Table 3c

PRODUCTION IN EU 15

Cereals MtFruit Primary Production Mt Oil Crops Primary MtMeat total Mt Milk TotalBeef and Veal Wine
EU 15215,025,12056,226,143 7,053,55536,244,088125,616,214 7,502,33515,526,148
CC10 as % EU 152510 191618 94
Second Wave as % EU 1525 2527713 75

Sir John Marsh

January 2004


 
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