Memorandum submitted by the Milk Development
Council (MDC) (CAP 11)
1. EXECUTIVE
SUMMARY
1.1 The MDC is a non departmental body and
does not engage in lobbying. The MDC is responding to this inquiry
on matters of fact and evidence and is not taking any particular
view in favour of or against the "Vision for the Common Agricultural
Policy". We have limited our comments to the questions the
committee have asked.
1.2 Equality of treatment of farmers is
essential from an economic efficiency view point. The Vision paper
states "production should be allowed to find a more sustainable
level, reflecting natural advantages (in terms of climate, and
terrain), competitive advantages (in terms of food quality and
safety) and rational trading relationships in a more open market".
In order to allow this to happen it is crucial that all trading
partners are operating to the same standards (environment, animal
welfare, competition rules). Where they are not, any additional
costs imposed on UK agriculture (eg gold plating of EU standards,
or additional standards—eg EU v developing countries) need
to be supported through direct Pillar II payments if an economically
efficient outcome is desired.
1.3 Intensification of agriculture is not
necessarily a result of support. The pig, poultry, and horticulture
industries have all seen massively increased intensification and
consolidation despite being unsupported sectors. In addition,
the use of irrigation (certainly within the UK) is used on unsupported
crops such as potatoes, as well as supported crops such as sugarbeet.
In the potato example, irrigation is being driven by market demands
for high quality crops, and economic demands for high yields.
1.4 Consequently it can not be assumed that
in every sector, or even in most, that reduction in support will
lead to extensification. Whether or not a sector intensifies or
extensifies will be the result of the complex interaction of a
number of factors: market needs, land values, land availability,
labour costs, feed values, environmental legislation, animal welfare
concerns, fertiliser costs, spray costs etc. In some situations
this may lead to extensification, in others, intensification.
1.5 The assumption that any reduction in
farmgate prices is passed through to the consumer through lower
retail prices needs to be questioned. In economic theory, with
active competition among retailers, you would indeed expect this
to happen. However, the evidence of the past few years, does not
suggest that lower farmgate milk prices lead to lower dairy product
retail prices. All the evidence suggests[17]
there is no consistent link between retail prices for dairy products
and farmgate milk prices. This does not necessarily suggest you
should not cut support, but does suggest that you should not assume
consumers will automatically benefit.
1.6 EU farmers may become more competitive
as a result of CAP reform due to the creation of opportunities
as many farmers leave, land availability increases and rents fall.
This would allow innovative and high performing farmers to expand,
increasing the overall competitiveness of the EU agricultural
sector. However, there is a social dimension to this which policy
makers may or may not wish to consider.
1.7 The obvious advantage that non tenants
have in any reduction in support is that they have a valuable
asset which can be used to secure lending which in turn can facilitate
expansion. However, although tenants have less capital to support
them, lower support should lead to lower rents, which may mean
little net impact on their profitability.
1.8 In conclusion, if the Government wishes
to meet its vision for sustainable model of EU agriculture, then
removing Pillar I support would probably facilitate that. However,
it may not provide all the environmental solutions that the Government
wants. In order to both improve/maintain the environment and allow
free markets to operate efficiently and effectively then careful
planning will be needed. In particular, care will need to be taken
not to penalise UK agriculture leading to a loss in revenue/production,
and at the same time export our environmental problems to other
countries with lower standards. A first step to ensuring this
does not happen is to benchmark imposed cost differences between
the UK and any other countries with which the UK has, or will
have in the future, free and open trade.
2. NO LOBBYING
2.1 This submission assumes that as the
Government's view is in favour of less Pillar I support, trade
liberalisation, and a free market, then the MDC's role is merely
to clarify points and offer evidence and analysis that will help
meet that goal. There are several points that are made in the
"Vision for the Common Agricultural Policy" that are
possibly misleading, and need to be thought about carefully when
considering how to implement this policy.
3. FOOD SECURITY—DOES
THE GOVERNMENT
REMAIN COMMITTED
TO UK FOOD
PRODUCTION?
3.1 Food security is a complex debate, and
whether the UK should seek to ensure a minimum level of food is
produced within the country is a policy issue on which the MDC
does not have a view. It is worth noting that the Vision paper's
own figures suggest that global liberalisation would reduce the
self sufficiency of high income countries from 98%-93%, a relatively
small change, and a level at which a country would in reality
be fairly secure in its food supply (taking into account current
food wastage levels). However, the paper's figures show that the
UK's self sufficiency is already much lower than that, at 76.9%
for indigenous type food drink (63.4% for total food[18]).
Any further fall might be of concern to some.
4. POTENTIAL
DISTORTIONS AND
INEQUALITY OF
TREATMENT OF
FARMERS ACROSS
THE EU
4.1 Equality of treatment of farmers is
essential from an economics view point if you want a free market
to determine the most efficient outcome. The paper states "production
should be allowed to find a more sustainable level, reflecting
natural advantages (in terms of climate, and terrain), competitive
advantages (in terms of food quality and safety) and rational
trading relationships in a more open market". In order to
allow this to happen it is crucial that all trading partners are
operating to the same standards (environment, animal welfare,
competition rules). Where they are not, any additional costs imposed
on UK agriculture need to be supported through direct Pillar II
payments. Examples of different rules include: gold plating of
EU standards in the UK, or additional standards—eg EU v
developing countries.
4.2 If the EU or UK Government wishes to
impose higher standards on farmers in order to protect the environment
etc then the additional costs of meeting those standards should
be paid for by the Government. If they are not, then a UK farmer
who may initially have a lower cost of production, due to competitive
and natural advantages, may lose out to a foreign competitor who
does not have to operate to the same high standards that impose
additional costs on the UK farmer. If this is allowed to happen,
then all that is happening is that the environmental problem is
merely being exported to the foreign country. This is not an economically
rational or efficient outcome.
4.3 It would appear that a logical and coherent
position would be that any additional environmental, animal welfare,
etc. costs imposed on UK farmers that competitors do not have
to meet, should be paid for by Pillar II direct subsidies. If
they are not, then an equitable position would be to prevent imports
from countries with lower standards. This would prevent exporting
environmental problems.
4.4 If the approach of paying for any additional
costs was used, then as standards around the world improved the
amount of support for farmers would be reduced. This would be
reduced to zero if all farmers were operating under the same conditions.
This would allow farmers to compete on their natural and competitive
advantages, leading to the most economically efficient outcome.
5. POSSIBLE ENVIRONMENTAL
CONSEQUENCES OF
THE PROPOSALS
5.1 The paper states "in particular
high levels of market support, has encouraged farmers to intensify
agricultural production". While this is probably true in
some areas (eg increased stocking densities on upland areas in
order to increase headage payments), intensification of agriculture
is not necessarily a result of support. The pig, poultry, and
horticulture industries have all seen massively increased intensification
and consolidation despite being unsupported sectors.
5.2 The paper also states that "Key
developments have included the substitution of capital equipment
for labour, the reduced level of on-farm recycling of plant and
animal wastes, and the increased use of inputs and services purchased
from beyond the farm. Such intensification has had a very significant
impact on the environmental impact of agricultural production".
Again reduced levels of support may not affect any of these developments.
In fact it may speed them up in some cases.
5.3 The substitution of capital equipment
for labour is not impacted by the level of support for agriculture,
but by the relative economics of labour and capital, which, as
you would expect in a high income country, are increasingly swinging
towards replacing labour with machines wherever possible. However,
it may be true that high support leads to inefficient production
systems with many non adding value activities being carried out
because the high support level allows them to continue.
5.4 The reduced level of recycling of animal
and plant wastes might be improved by reduced support. With high
levels of support, there is less incentive to make the most of
the nutrient values of wastes, as using artificial fertilisers
is much simpler. Lower returns will encourage the maximisation
of the value of all wastes.
5.5 However, practical issues in the use
of animal wastes, such as the dispersed nature of land holdings
must be taken into account. The economics of moving and applying
large volumes of effectively free waste over long distances may
compare unfavourably to purchasing artificial fertiliser, but
having much lower application costs due to its lower volume. This
might be countered in the longer term if reduced support led to
a more liquid land market allowing farmers to consolidate land
holdings.
5.6 High support may allow some inefficient
farmers using too many sprays to continue farming. However, the
current economic and environmental pressure on farmers to reduce
the numbers of sprays should not be underestimated. In addition,
due to market demands for quality, it is questionable how much
reduction in sprays can be undertaken. A good example of this
is that potatoes—an unsupported sector—are sprayed
very regularly and at more cost than a supported cereal crop.
5.7 In dairy, it is questionable that if
support is reduced whether much production would become extensive.
It is more likely that it could become more intensive. This is
because of the primary market demand for a level supply of milk.
It is currently not believed possible to keep cows outdoors all
year round in most parts of the country and produce the level
supply of milk needed. If, because of weather and market demands,
housing and expensive feeding and slurry handling systems are
needed, then a reduction in milk price could result in an increase
in larger, more intensive units with high yielding cows. This
is because high milk yields per cow will be needed to spread the
fixed costs of the housing, feeding and slurry systems. These
costs per cow will be the same whether the cow is yielding 5,000
litres or 10,000 litres. The higher yielding cow will cut the
fixed costs by 50%, giving a clear advantage to a more intensive
system. These systems will probably be based on maize and arable
silages, increasing the amount of maize grown.
5.8 For some dairy farmers, where they have
a market that can cope with seasonal milk supplies (a very small
proportion of the market), these farmers may become more extensive.
They will keep cows outdoors all year round, will have a low stocking
rate and will have to be very careful to avoid serious damage
to land in the winter. (This system will probably not work in
wet and heavy land parts of the country.) However, this will be
a more extensive system.
5.9 The use of irrigation (certainly within
the UK) is used on unsupported crops such as potatoes, as well
as supported crops such as sugarbeet. In the potato example, irrigation
is being driven by market demands for high quality crops, and
economic demands for yields. A reduction in support would therefore
not necessarily result in a reduction in demand for irrigation.
5.10 Consequently it can not be assumed
that in every sector or even in most that reduction in support
will lead to extensification, lower use of inputs or irrigation.
Whether or not a sector intensifies or extensifies will be the
result of the complex interaction of a number of factors: market
needs, land values, land availability, labour costs, feed values,
environmental legislation, animal welfare concerns, fertiliser
costs, spray costs etc. In some situations this may lead to extensification
and in others, intensification.
5.11 The payment of Pillar II subsidies
to encourage extensification can obviously encourage farmers to
produce in that way, but they will have to be of sufficient value
that any benefit that intensification can give over extensification
is replaced by the subsidy.
6. THE EXTENT
TO WHICH
THE PROPOSED
CHANGES TO
THE CAP WOULD
RESULT IN
LOWER FOOD
PRICES
6.1 The assumption that any reduction in
farmgate prices is passed through to the consumer through lower
retail prices needs to be questioned. In economic theory with
active competition among retailers you would indeed expect this
to happen. However, the evidence of the past few years does not
suggest that lower farmgate milk prices lead to lower dairy product
retail prices. All the evidence suggests[19]
there is no consistent link between retail prices for dairy products
and farmgate milk prices. This does not necessarily suggest you
should not cut support, but does suggest that you should not assume
consumers will automatically benefit.
6.2 The following graphs show the changes
in farmgate prices, wholesale prices and retail prices. There
is no real link between retail prices and farmgate prices, with
retail margins increasing significantly over the time period.
It is by no means certain within the dairy sector that lower farmgate
prices will lead to consumer prices. Recent history suggests that
any farmgate price falls result in larger retailer margins. This
area is being investigated to some degree by the OFT in their
ongoing investigation.
6.3 The situation in much of Europe seems
to be similar, with retail prices not being affected by changes
(falls) in farmgate prices. One exception to this might be the
German dairy market where changes in farmgate prices do seem to
be passed through to retail prices. Whether this is because of
the influence of the discounters or not is unclear.[20]
7. HOW SUCH
A REVISED
CAP WOULD ENABLE
THE EU'S
FARMERS TO
BE MORE
COMPETITIVE
7.1 Competitiveness depends on having access
to resources at a competitive price, having natural advantages
and then using management ability to use those resources and natural
advantages in the most productive way possible. High CAP support
does increase the value of resources (eg rent) and allow farmers
with lower management ability to use those resources less productively
and still survive.
7.2 A reduction in support should lead to
lower rents but perhaps not land values. Land value is often not
linked in fully to the agricultural value, due to demand for land
from outside agriculture. Lower support would prevent poor managers
of resources from continuing to be profitable. This would create
more opportunity for better managers to expand and use those resources
in a more productive manner as land will be more available and
rents lower. This will increase the productivity of the sector.
However, policy makers may or may not want to consider the social
aspect of creating those opportunities which will be to drive
many farmers out of agriculture.
How the proposals would differently affect the
tenanted and non-tenanted sectors across the EU
7.3 The obvious advantage that non tenants
have in any reduction in support is that they have a valuable
asset that can be used to secure lending, which can facilitate
expansion. However, landowners may lose out with rent values falling,
and land values being affected to a degree in the areas where
there is less non-agricultural interest in land.
7.4 Consequently, although tenants have
less capital to support them, lower support leading to lower rents
may mean little net impact on their profitability. However, this
would depend on the time difference between the reduction in support
and the reduction in the rent. Any great difference between the
two could lead to significant difficulties for tenants. A well
functioning and fluid land market would help reduce any problems.
8. CONCLUSION
8.1 In conclusion, if the Government wishes
to meet its vision for a sustainable model of EU agriculture,
then removing Pillar I support would probably facilitate that.
However, it may not provide all the environmental solutions that
the Government wants. In order to both improve/maintain the environment
and allow free markets to operate efficiently and effectively
then careful planning will be needed. In particular, care will
need to be taken not to penalise UK agriculture leading to a loss
in revenue/production, and at the same time export our environmental
problems to other countries with lower standards.
8.2 One approach to ensure that this does
not happen could be to ensure that UK environmental, animal welfare,
tax and regulatory standards are benchmarked against any country
with which we have free trade/open market. Any differences in
cost created by imposed legislation and regulation should then
be paid for by Pillar II subsidies, allowing a fair and level
playing field for all farmers. This will probably create the situation
the Government's Vision paper sets out. However, any additional
regulation placed on UK farmers compared to EU farmers, or EU
farmers compared to non EU farmers (if there is an open and free
market) without support to compensate would probably result in
environmental and other problems being exported to other countries.
February 2006
17 Study by Portsmouth University, Dairy Supply Chain
Margins 2004/5 (MDC). Back
18
Source: Defra. Back
19
Study by Portsmouth University, Dairy Supply Chain Margins Report
(MDC). Back
20
Please see Dairy Supply Chain Margins 2004/5 (MDC) for more information. Back
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