Joint memorandum submitted by Defra and
HM Treasury (CAP 30)
1. This joint memorandum provides Defra's
and HM Treasury's written evidence to the Committee's Inquiry
into the UK Government's paper "A Vision for the Common Agricultural
Policy".
2. The paper was designed as a contribution
to the debate already underway on how to achieve a sustainable
future for agriculture and to help answer those who have asked
what the UK Government means when it calls for further CAP reform.
It raises questions about the effectiveness, sustainability and
affordability of the current Common Agricultural Policy, presents
a vision for what a sustainable model of European agriculture
might look like and considers the implications of further reform.
It further examines agricultural protectionism at a global level,
with a particular focus on the impact of developed country policies
on developing countries.
3. Radical change of the sort proposed in
this paper has to be seen in the longer-term perspective. The
vision in this paper focuses on where we need to be in 10 to 15
years time, and why. It does not set out a detailed route map
for getting there.
4. This memorandum addresses the issues
raised by the Committee in its press notice. The evidence and
the Government's position are set out more fully in the paper.
EXPENDITURE ON
"PILLAR 1" OF
THE CAP
5. The Government's vision questions the
justification for existing expenditure in Pillar 1 of the CAP
(market support and direct payments) and recommends phasing out
all support by 2020. The EFRA Committee is interested in the likely
impact of these proposals, with specific reference to:
Food security—does the Government remain
committed to UK food production?
6. The Government will always seek to promote
sustainable UK food production. This is clear from the work we
have undertaken in collaboration with the farming industry to
implement the Strategy for Sustainable Farming and Food. One of
the key principles for that strategy is the production of safe,
healthy food in response to market demands, and we continue to
support this. Whilst the Government does not have a self-sufficiency
target, in 2003, the UK was 76.9% self sufficient in respect of
"indigenous type food and drink," and of the indigenous
type food and drink imported into the UK, the other 24 members
of the EU accounted for 72.9% by value. Research suggests (see
paragraph 3.44 of the vision paper) that agricultural self-sufficiency
of richer countries would decline only modestly as a result of
liberalisation. Furthermore, the position of UK farmers at the
heart of one of the world's richest markets should not be overlooked.
7. However, it is important not to equate
food security with self-sufficiency. As the vision paper sets
out (p 47), domestic production is neither a necessary nor sufficient
condition for food security. For example, many of the inputs used
by UK farmers are sourced from overseas, and trying to ensure
food security solely by promoting domestic production would ignore
the global dimension of modern food production. Furthermore, relying
on domestic production alone does not insulate a country from
risks such as climate change, natural disasters, fluctuations
in world markets, health crises etc The widening of trade opportunities
should be good for international food security, and thus for UK
food security.
8. It is also worth noting that the number
of farmers or farms is not a direct indicator of food security
or self-sufficiency. Over 80% of UK food production now comes
from just one quarter of all farms, with the largest 10% of farms
producing over half of total food output.
Potential distortions and inequality of treatment
of farmers across the EU
9. Phasing out market support and direct
payments would reduce distortion and inequality of treatment of
farmers across the EU. The CAP has traditionally favoured certain
products over others, and prevented farmers from responding to
market signals. As the vision paper notes, the CAP is an inefficient
way of supporting farmers, and many of the benefits accrue to
landowners, who may or may not be farmers. Phasing out market
support and direct payments and moving towards the more sustainable
vision for agriculture presented in the paper would reduce these
existing distortions, and lead to a situation where farmers in
the EU were competing solely on the basis of price, quality and
other market demands.
10. It would be important to ensure that
EU state aid rules for agriculture, as for other sectors, were
fit for purpose and rigorously enforced, in order that any national
aids such as those to secure environmental objectives did not
create new distortions.
Possible environmental consequences of the proposals
11. The intensification of agriculture in
the EU over the last 20 to 30 years has caused significant environmental
problems such as water pollution and damage to wildlife and bio-diversity,
as evidenced by the steep decline in farmland bird populations
across the EU. Cleaning up diffuse water pollution caused by agriculture
is estimated to cost £211 million a year in the UK, another
cost ultimately borne by all citizens in their water bills. This
intensification has been amplified by the high levels of market
price support in the CAP: an incentive our vision would remove.
Whilst aspects of the CAP such as cross-compliance and set-aside
can have positive environmental benefits, these could be secured
in a more efficient and targeted way.
The extent to which the proposed changes to the
CAP would result in lower food prices and (through reduced public
spending on the CAP) a lower level of taxation
12. The financial costs of the CAP are set
out in some detail in the paper, and are estimated by the OECD
at around €100 billion for the EU25, half due to higher food
prices and half due to taxes. It is difficult to predict the precise
extent to which further CAP reforms would lower food prices, as
other macroeconomic factors will also have an effect on future
food prices. However, as the vision paper notes (p 20), it has
been estimated that the CAP is equivalent to a value added tax
on food of about 15%. Reform away from price support would lead
to a fall in average prices (as measured by the Consumer Price
Index) throughout the EU of around 0.9%. It would also enable
a substantial reduction or redirection of the EU budget and consequent
alleviation of the burden on the UK taxpayer.
How such a revised CAP would enable the EU's farmers
to be more competitive
13. At present the CAP regulatory framework
acts as a barrier to entrepreneurship and the natural evolution
of the industry. The benefits of the CAP accrue primarily to the
initial owners of land and other inputs, inflating costs and making
it difficult and expensive for others to enter farming, or for
more efficient producers to expand their operations. The support
currently provided by the CAP allows farms to continue operating
inefficiently at relatively high costs of production.
14. In a liberalised CAP, these barriers
would be removed and the industry would adjust, be free to grow
and make efficiency gains like any other industry. The reforms
of 2003 are a significant step in reconnecting farmers with markets,
and further liberalising reforms would carry on this trend. This
does not mean that farms would necessarily become more intensive
(indeed there are good reasons to believe that many would become
less intensive, as explained in the paper).
How the proposals would differently affect the
tenanted and non-tenanted sectors across the EU
15. Adjustment in agriculture is the norm.
The sector is constantly adjusting, even when it benefits from
high levels of support. Policy reform is but one additional (although
significant) source of adjustment pressure. A reduction in agricultural
prices as a result of reduced levels of support would reduce agricultural
profitability in the short term, until agricultural costs are
bid back down. As the paper notes, well functioning land markets
are critical to the process of structural change, to securing
economies of size, to diversification, to maintaining international
competitiveness and to securing credit. If the Government's vision
were implemented, the tenanted sector across the EU would experience
a temporary fall in profitability before benefiting from lower
rents. Owner-occupiers and non-farming landowners would see the
agricultural value of their farmland fall, although it should
be remembered that the agricultural value of land is only part
of the price of agricultural land.
16. The impact on individuals would also
depend in part on the time at which the land had been purchased.
As explained in the paper, capitalisation of support means that
the benefits have accrued primarily to those in farming when the
various elements were introduced. Those who have held land all
this time have had a windfall gain and would have a windfall loss.
The implications of the proposals for the applicant
countries to the EU
17. As it currently exists, the CAP does
not provide the right framework for agriculture to restructure
and modernise and actually works against sustainable rural development.
Like the 10 new Member States, Bulgaria and Romania should gain
from a reformed CAP which targets resources at the development
of rural infrastructure, services and the creation of diverse
employment opportunities. The same applies to Croatia and Turkey.
THE RURAL
ECONOMY
18. The Committee is interested in how the
UK's rural economy would fare under the changes proposed in the
report.
19. The paper notes that even in the most
rural regions agricultural employment is by no means dominant.
In areas defined as "predominantly rural" in the UK
in 2001, the rate of agricultural employment was only 7.2% (Table
3.5). While agriculture has strong links with other rural industries,
the paper quotes an OECD study which found that while farm employment
has been on a long term decline, employment in closely related
industries has remained stable or even increased (3.35). And over
the past decades there has been a strong trend of a shift of employment
from agriculture to other industries. This suggests that the rural
economy has already adjusted to changes in the agriculture industry,
and will do so in future. Furthermore, the vision paper states
(1.32) that future EU spending on agriculture should be based
on the current Pillar II. Pillar II funding is directly targeted
at agri-environment schemes and other public goods which stimulate
the rural economy.
INTERNATIONAL ISSUES
20. The Committee is interested in the report's
assessment of the impact of CAP reform on developing countries,
and its conclusions about the erosion of trade preferences and
the potential benefits of a liberalised agricultural market in
the EU and other OECD countries. The Committee is also interested
in the effect the proposals would be likely to have on the global
economy more widely.
21. The paper sets out (4.4 onwards) how
EU protectionism and market price support in particular are damaging
to developing countries. The paper cites IMF predictions that
suggest that while preference erosion will cause serious adjustment
problems for a relatively small number of countries, it is unlikely
to be a significant problem for the majority. The challenge will
be to ensure that complementary policies and additional finance
is provided alongside agricultural reform, in order to alleviate
the short to medium term shock of preference erosion.
22. Most of the available studies assume
agricultural liberalisation as part of a wider WTO round, and
it is therefore difficult to say what the effects on the EU, other
OECD countries and the global economy would be. The paper quotes
World Bank figures which suggest that global income could increase
by $290 billion by 2015 if trade-distorting policies in merchandise
trade including agriculture were eliminated (4.3).
THE WIDER
DEBATE ON
FUTURE FINANCING
OF THE
CAP
23. The EFRA Committee is interested in
how the reforms proposed in the report could be achieved in practice,
and how these changes relate to the ongoing debate surrounding
the future financing of the CAP. What barriers might be put in
the way of implementing such reforms by other EU member states?
24. The Government set out broad parameters
of how its vision could be achieved in practice in its paper,
particularly in paragraphs 1.33 to 1.37. Gradual and carefully
managed change will be important to give clear signals and time
for farmers to adjust their businesses.
25. One important component of the Government's
vision is an end to the market support mechanisms and direct payments.
The elimination of export subsidies following completion of the
Doha Round, a move the Government has championed, will provide
a major impetus for reform of the first. Direct payments could
be phased out in a number of different ways. For example, the
House of Lords European Union Committee recommended that the single
farm payment should continue only until 2013[1].
Other approaches might involve different profiles. The vision
paper was published to stimulate debate, and these are the kinds
of issue which will need to be debated with stakeholders in the
UK and in the EU, including with other Member States in the context
of the review of the EU budget in 2008-09.
March 2006
1 House of Lords European Union Committee, 2nd Report
of Session 2005-06, The Future Financing of the Common Agricultural
Policy, HL Paper 7-I. Back
| 
