Memorandum submitted by J Cresswell (CAP
04)
Enclosed are a farmers "worm's eye"
comments on the Treasury paper published in early December 2005.
I start with some general points and end with specific points
which are related to the document's paragraphs.
Overall, I find this document really depressing.
But starting with the positive:
1. They acknowledge that much more must
be done to encourage EU partners to move more fully to decoupling.
2. They also acknowledge that current land
tenure arrangements in the UK are not satisfactory for a sector
to be exposed to global forces.
3. They acknowledge the importance of clear
and early direction to producers so they can make changes, and
the role of transitional arrangements in some situations.
On the negative:
1. There are plain inconsistencies: if so
keen on Pillar 2 measures as this document makes clear, why in
early December was HMG trying to abolish co-financing which could
well lead to less Pillar 2 funding in 2007 than 2006? Do they
want to save the maximum amount of taxpayer money (as abolishing
co-financing would suggest) or do they want to see more funds
available for rural development as implied in this document?
2. Another major inconsistency is to be
found in the fact that the authors cannot make up their minds
if they would like a farming industry that is globally competitive
or festooned with environmental regulation. The two objectives
are clearly not reconcilable.
3. There is little or no recognition of
environmental improvements which happened long before MTR was
thought up. The authors appear to have a grasp of the damage that
farming is doing to the UK Government a full 20 years out of date.
4. The document fails to make a convincing
case as to why allowing more access to our markets would improve
the plight of some of the poorest in the world. It even concedes
that: "Selective preferential access (ie presumably higher
prices) ... has not assisted long term development or increased
the integration of poor countries into global markets".
5. They have an unrealistic expectation
that farmers could use a combination of lower input prices, derivatives
and increased technical efficiencies to offset the full effects
of the removal of the CAP. We believe that input values are unlikely
to fall in response to a removal of the CAP, we think that technical
efficiencies are actually likely to fall compared to those of
global competitors in the future, and we think that the possible
role of derivatives in alleviating the trading position of growers
is overstated.
We are therefore seriously concerned that the
Treasury's conclusion (that the impact of CAP removal "would
be relatively modest") is flawed—certainly in terms
of commodity production in the UK.
We would be happy to expand on our reasoning
if this was of interest.
6. Hence their suggestion that levels of
European farm production would not be greatly affected by these
changes seems most unlikely. There appears to be no real thought
or analysis given to the effects that a reduction in farming activity
would have on the more rural areas of the UK. They fail to acknowledge
the negative and dominant effect that a strong currency has on
the fortunes of commodity producers.
7. The "Vision" says remarkably
little about the desirability of "reconnection" (ie
the creation of a market environment in which UK producers can
sell their produce to UK consumers at higher than world values)
which was accepted by the Curry Commission as essential if UK
farming is to thrive in a more "global" environment.
We hope that this omission does not mean that the Treasury regard
that the Implementation Group, levy bodies and other agencies
tasked with the job have succeeded.
CONCLUSION
I. So the key element of the Treasury's
"Vision" for commodity producers appears to be on the
one side to remove some 25% of their income in the form of CAP
subsidies whilst at the same time exposing them to world markets
(ie generally lower and more variable prices).
II. They seem to be of the opinion that
these effects will be counteracted by improved technical efficiency,
use of derivatives and lower input values, although very little
evidence is cited to support the assertion that this will occur.
III. Since it is fairly common knowledge
that commodity production in most sectors has been on the edge
of viability for some time, it would appear that the Treasury's
"Vision" is seriously flawed on the basis that they
would like to see farmers end up as "internationally competitive"
and "rewarded by the markets for their outputs".
IV. What makes the "Vision" even
more extraordinary was the publishing last October of a sizeable
survey of the British public, paid for with public money and commissioned
by Don Curry's Implementation group. It was executed by the Institute
of Grocery Distribution—not renown as a pro farming organisation.
The survey revealed that 75% agreed that "without farming
Britain would be a worse place" and 86% thought that "Britain
should remain a strong farming nation". So at the same time
as the Treasury has a plan to dismantle British farming, their
own survey work reveals that this is the last thing that the public
appear to want.
POINTS OF
DETAIL
1.11 Lisbon Agenda. Didn't the Lisbon Agenda
also have quite a lot to say about the effect of regulation on
the global competitiveness of the EU? If they are going to invoke
Lisbon to argue for the liberalisation of markets, then to be
fair it should also be invoked to rein in the massive amount of
regulation (much of it environmental) currently sweeping the countryside
and making EU agriculture less competitive.
1.13 "OECD has estimated that up to
90% of the value of COUPLED area payments is rapidly capitalised
into land prices ..." So logically, now that in England payments
are decoupled, we can expect land values to "rapidly"
decapitalise. Haven't seen this yet, and the experts are not predicting
such an effect. Could the OECD be wrong?
Also this paragraph states: "... the benefits
accrue mainly to the landowner ...". This seems to assume
that any element of payments that go to a landowner are completely
lost to farming. I think that this is not necessarily so—the
landowner may well be using these payments to invest in such a
way as to benefit the active farmer (eg Storage sheds), or as
a landlord the recipient may be picking up costs relating to the
land (eg drainage repair/ditching or insurance costs, etc). Just
because the landlord keeps payments does not mean that the active
farmer derives no benefit at all from them. Or that they are lost
from rural areas.
1.14 For many quotas (eg milk and sheep
(SAPS)) new entrants have been able to get a very good return
on investment in quotas because, with hindsight, they have been
undervalued most of the time. Thus without the quota systems,
these new entrants would have been worse off. And in addition
it is not true to say that these quotas have kept new entrants
out on account of scarcity—historically usually there appears
to have been a fairly liquid trade in most types.
1.15 and 1.16 Is it really valid to compare
farmer incomes with average disposable incomes? I would guess
that the activity rates in farmer households—on average—are
higher than the average so wouldn't one expect higher incomes?
And in addition farmers—unlike many in society—take
risk and have to provide capital. If you are trying to argue that
farmers are not starving in western Europe—fair enough.
But it hardly tells us as to whether they will get sufficient
payment to keep them on the land.
1.21 The EU may account for "over 40%
of OECD market price support", but this is not the method
of choice for other countries and trading blocs, surely? They
support growers by other means, so is this very meaningful?
1.25 Strange not to acknowledge enormous
advances in environmental standards which were taking effect long
before the present reforms were even thought of. For example in
2000 94% of English river length classified by EA as "good
or fair" in terms of chemical or biological quality—10%
better than 1990.
1.26 Sad, too, that HMT has been suckered
by single issue pressure groups into believing all they are told
on bird numbers. According to DETR when it existed there were
more birds and more bird species in the UK at the end of last
century than 100 years before.
1.26 And again strange that the estimated
cost of £211 million to clean up diffuse water pollution
isn't set in context against the cost to the industry of not using
fertilisers. Neither is it clear whether all this diffuse pollution
is caused by ongoing farming operations: how much from activities
which took place years ago? How much from other industries? How
much is naturally occurring, or from unintensive farming systems
(eg organic)?
1.27 "In a less regulated and supported
environment, the agricultural sector will use fewer resources".
Surely now that support in the UK is decoupled, use of agricultural
inputs is logically independent of such payments? And it seems
pretty obvious that production levels will depend not on such
factors as climate, terrain, food safety and quality, but relative
exchange rates.
1.30 HMG should certainly be pushing for
full decoupling elsewhere in Europe as soon as possible.
1.33 "De-linking such payments from
land ..." A strange call from a Government that insisted
on linking SPS to land in England in the teeth of most of the
expert advice given to it not yet two years ago.
1.34 "Entrepreneurial, customer focused
EU farmers, using modern risk management instruments and marketing
techniques and environmentally sustainable production methods,
would become the norm". Just what evidence is there that
this would be the case? I would have thought that an unprofitable
industry with even less protection from global markets in which
they can rarely compete because of high levels of regulation and
adverse exchange rates is far more likely to simply close down.
2.7 In their frenzy to attack CAP, have
the Treasury taken into account the benefits of CAP?
— stability of food prices;
— investment and research which has
taken place due to certainty of markets created by CAP;
— the fact that CAP sometimes PROTECTS
consumers from higher world prices;
— the fact that CAP has protected rural
communities in many parts of Europe, and slowed their decline.
This may not interest the Treasury but it is a matter of concern
for many people in Europe; and
— the fact that CAP has probably made
some of the poorest rural dwelling people of Europe a little richer.
Furthermore even if far from perfectly allocated,
presumably some of these payments are "recycled" in
taxes and economic activity that would not otherwise take place.
2.8 Even if removal of CAP was to lead to
an increase in total EU wealth, this is presumably an overall
effect. What would be the effect on areas highly dependent on
agriculture?
2.11 Price cuts as a reward for removal
of CAP are referred to as a certainty. But suppose cereal production
in the EU is halved as a result of elimination of CAP and 100mt
is no longer grown in Europe but is imported. Surely—as
a good with inelastic demand characteristics and in a world with
historically very low stocks—there is a perfectly good chance
that the EU consumer could find themselves paying considerably
more.
2.13 "... 90% of the value of coupled
area payments is rapidly capitalised into land prices ...".
It was HMG's choice to leave these coupled to land under the new
SPS system ... And again, just because payments go to landlords
does not mean that all benefit is lost to farming.
2.14 The things that are most likely to
tempt in "farm entrepreneurs" from other parts of the
economy are high prices and stable markets, and these the Treasury
seems to want to destroy. And in real life "entrepreneurs"
have not been hindered by quotas, etc, but have gained from them.
2.16 But surely the Treasury must have noticed
that the CAP has not prevented agricultural restructuring. We
know from previous experience (look at former East Germany) that
CAP will result in modernisation and restructuring and far fewer
people working in farming in Accession States. And it will be
rapid. So why worry on this score?
2.17 I don't really understand the social
equality point. From Chart 2.3 it appears that agriculture takes
far less of the share of GDP than agricultural employment rates
would suggest that it should, and this gap is particularly extreme
in some of the Accession States. Surely in terms of social equality
this is an argument to direct MORE spending on farming, not less.
2.18 And again surely the argument on food
prices can also be inverted: if 20% of Poland's poorest people
work in agriculture, should we bemoan the fact that food prices
are increasing? As long as some of these price increases are coming
back to the farm, surely this is the way that the market can smooth
out the inequality between farming and other sectors? The argument
regarding the percentage spent on food smells strongly of nonsense
too: if you are a poor Accession farmer and spending 15% of your
income on food but receive 100% of your income from food, surely
the net effect of an increase in food prices is to improve your
position?
2.26 Are not comparisons between minimum
wages and support payments per farmer more suited to tabloid arguments
than rational debate? So what if French farmers receive €17k?
As I understand, their payments are pretty much coupled—it
is unlikely that these support payments go straight to his bottom
line if my accounts are anything to go by. And maybe he deserves
a bit more than the average anyway—he takes trading risk,
employs his own capital and looks after a national asset. Also,
what about activity rates between farmers and their families and
the population average?
2.29 I don't think that £290k net worth
on a small farm in the UK is very significant. Neither is it comparable
necessarily with net worth of other individuals in other sectors.
I have looked at plenty of tenants farm balance sheets on which
50% of the assets are in a combine harvester! Hardly a very liquid
asset—or one which is yielding much of a year-on-year return.
But the Treasury wants to compare this to—say—a portfolio
of listed equities!
2.30 It is not clear whether HMT sees the
"key developments" listed here as good or bad. From
the tone of the document to date I guess one must assume bad.
"Substitution of capital for labour", however, has massively
improved standard of living for those on farms, in terms both
of the quality of their lives (less drudgery and better safety)
and earning capacity. It is—in my opinion—a very good
thing. I don't understand the point about "reduced level
of on-farm recycling ..." Residues of straw and muck are
returned to the ground as much as—maybe more than—they
ever were. Could they be referring to the Government's nutty regulations
preventing us from burying dead stock on farm? And "increased
use of inputs and services beyond the farm" is also known
as "reducing unit costs of production" or "being
globally competitive".
2.36 It is also important to note that the
statistics also show that fertiliser usage was falling before
MTR, and that water pollution is fading as a national issue—see
the EA stats.
2.43 So high prices attract more inputs
into farming? It is certainly true that falling prices will reduce
the area of land on which it is possible to make a profit—the
pool of land that can grow profitable wheat in the UK at £60/t
will be smaller than if the price is £70. However what is
absolutely NOT true is that once the decision to grow on a given
acre is made is that it is possible to increase profitability
by reducing inputs. Growing a technically suboptimal crop is an
extremely hazardous enterprise to undertake financially, and this
effect is well recorded.
2.44 Agricultural intensity is what makes
UK farming internationally competitive. We are an inherently high
cost area of production, and we can only cut our costs per tonne
by growing very heavy yields. If there is a link between environmental
damage and agricultural intensification, what does the Treasury
want to do about it? Make no mistake: less intensity = increased
cost per tonne. It's very easy to demonstrate.
2.45 Has anyone done any analysis of the
environmental effects of growing the food we need overseas? Wouldn't
there be likely to be environmental consequences in South America
if Argentina and Brazil broke out sufficient ground to grow the
100mt of cereals required if the EU halved its wheat production?
Or perhaps, being out of sight, that doesn't matter?
2.47 On cross compliance I think they are
flat wrong. It is easy to keep land in GAEC. It is wrong to say
that complying with the old regs will be cheap—farmers can
now afford to take not the slightest risk in breaking these because
the financial penalties are so serious. I can give an example
of an entire herd of suckler cows being slaughtered last autumn
as the farmer simply could not logically accept the risk of contravening
BCMS rules. Applying new penalties to old regs certainly does
not mean that there is no effect.
3.2 "The evidence suggests that the
impact of CAP reform on EU agricultural production would be relatively
modest ..." Not from where I am sitting. We think in England—with
full decoupling—it is actually falling significantly already.
Certainly with cereals and beef—not yet sure about sheep.
3.4 "... part time. This is consistent
with a picture of a relatively small number of large commercial
operations and a large number of small ..." No. It is consistent
with a picture of a large number of people who still think of
themselves as farmers being forced to find off farm income.
3.5 "... returns to labour and capital
employed in agriculture often appear to be depressed relative
to returns in the rest of the economy". No. They ARE depressed
relative to the rest of the economy.
3.6 "Theory suggests ... this process
bids up the price of agricultural inputs ..." Bugger the
theory—there is simply no historic correlation between the
price of inputs and farm profitability for land or any other input.
We've looked for correlations between the DEFRA datasets repeatedly
for the last 15 years and this effect does not exist. If one takes
the trouble to speak to international input suppliers you will
discover why there is no correlation—they are simply not
forced to sell their wares in the EU and are entirely comfortable
with the idea of pulling out or retrenching and redeploying their
resources elsewhere. On land, compare rent data with DEFRA's data
on farm profitability over the last 15 years—there is no
link. Nice theory, though ...
3.7 Since the "theory" of 3.6
is clearly flawed, the conclusion of this paragraph is left swinging
in the wind. It is HIGHLY likely that the removal of subsidies
and import protections WILL lead to a significant reduction in
European farming.
3.10 The foreign examples feature the word
"deregulation" frequently. Do we really expect to see
a reduction in the number of regulations that restrict us? Surely
the reverse.
3.11 NZ did their reform against the backdrop
of a weak currency and inherently low cost production systems.
Plus (at the time) regulation with a very light touch. We have
the opposite, so the analogy is truly weak. You ask the commodity
producers of NZ how well they have done recently with a stronger
currency.
3.15 But let's not mince words—surely
the net effect on the EU consumer will be an increase in price
volativity?
3.16 Care over diversification. It has been
proved on many UK farms that a good way to INCREASE risk is on
a farm is for the principal decision maker to take their eye off
the core business. Specialisation = technical competence.
3.17 How do these comments relate to the
1/3 of land farmed by tenants? With higher
costs and very little equity, what's the prospects for these guys
in HMT's brave new world?
3.19 Farmers are wary of derivatives for
good reason. The UK countryside is littered with the casualties
of growers dabbling in these markets—Viking Cereals being
but the latest example. They are playing in a very intense game
against people who know considerably more about it than they do.
The liquidity of LIFFE is a joke: as an active user of derivatives
I know that much of the time that I wish to make a move there
is no-one to trade with. Options are very expensive—the
premium can easily cost 10% of the strike value—not that
attractive when the strike is usually on the wrong side of break
even. Derivatives certainly have a role to play in managing risk
but they will not substitute for a fundamentally unviable market.
And if a grower was able to use them for this purpose, why is
he wasting time growing? He could more easily make his money out
of the market.
The point about improving liquidity by removing
regulation on the basis on experience in RSA is interesting.
3.23 I think that the economic inefficiencies
of growers is overplayed. Most UK growers have found themselves
repeatedly losing money over the last few years. That is a very
good incentive to get technically competent, and I believe most
have done so. I suspect that most of these differences in technical
efficiencies are as a result of factors outside their control—beef
producers in the south east of Scotland probably have six weeks
less grass growth than colleagues in the south west, for example.
How can you expect them to produce with similar costs? Two years
ago I ploughed in 1/3 of my oilseed rape
as a result of exceptional rain at harvest that was not seen in
East Anglia—such factors not visible from a desk in Whitehall
will make comparative stats look odd.
3.34 I wonder about some of these employment
stats. My local County Council did some work at the end of the
90s and estimated that over 40% of the workforce in their area
was dependent on farming. I also wonder whether these data sets
take into account more complicated relations with farming. My
stockman's wife may run a successful business making crafts—nothing
to do with farming—but she would not be here in this area
if her husband was not looking after my cattle and sheep. So if
he loses his job there will be a double effect on local employment.
Likewise many of the jobs in rural communities are surely dependent
on farming beyond those in auxiliary industries—the lady
who teaches my stockman's sons (poor woman) or the man who checks
out their groceries.
3.35 "... rural communities have already
adjusted to major changes, hence proving themselves capable of
responding to further change ..." Makes my teeth grind ...
of course rural communities will change if they have to, but surely
the point is at what cost and what effect will it have on these
communities?
3.40 It's all so unconvincing. If we are
concerned about food standards and want to verify production at
all stages, then surely it is easier to do this when the food
is produced within the UK.
3.46 "... wide range of inputs, many
of which are sourced through international markets". That
is not the same as saying that many of these inputs COULDN'T be
produced domestically if necessary.
3.52 Of course some extensive, sub marginal
farming systems might survive the removal of the CAP. But surely
one must accept that they are LESS likely to survive in a climate
of no support, lower prices and increased volatility?
3.56 "82% of food miles in the UK food
supply chain are generated within the UK ..." Yes, but surely
the question is how would this change if as a result of removing
CAP we drew our food from overseas?
3.59 "... using high levels of agricultural
support in OECD countries as an instrument of environmental protection
is likely to be highly inefficient and ineffective". Surely
this is simply not necessarily so. If the objective is to ensure
that further rainforest is not turned into productive farm land,
then using subsidies and tariffs to keep production in OECD countries
could be highly effective. It may not be just effective, it may
be the only way of preventing further agricultural intensity in
environmentally sensitive areas.
4.5 CAP is slated for keeping food commodity
prices unrealistically low. Are there not winners from this effect—ie
poor and hungry people? Where is the analysis that shows how they
will be affected by increased food prices?
4.6 How many of the crops grown in the most
poor countries actually compete with crops grown in the UK? How
suitable is much of Africa to grow wheat?
4.17 "Selective preferential access
... has not assisted long term development or increased the integration
of poor countries into global markets". Doesn't selective
preferential access imply higher prices? So they are saying that
higher prices do not lead to improvements in the conditions of
poor countries? So why are we worried about prices or market access
at all?
December 2005
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