Memorandum submitted by the National Farmers'
Union (NFU) (CAP 12)
EXECUTIVE SUMMARY
1. The NFU represents over 55,000 farmers
and growers in England and Wales. The Common Agricultural Policy
(CAP) provides the environment within which our members operate.
As such, policy developments, proposals or position documents
related to the CAP are of the utmost interest.
2. HM Treasury and DEFRA jointly released
on 2 December 2005 a document setting out "A Vision for the
Common Agricultural Policy". Given the potential impacts
of the proposed changes on British farmers, the NFU has analysed
the document. The NFU thanks this Committee for providing an opportunity
to present this submission.
3. The NFU does not quarrel with most of
the objectives of agricultural policy as outlined in the document.
But it fails to present a "roadmap" of how those objectives
are to be practically achieved and whether progress at the national
level is conditional on developments at EU level. This is a particularly
problematic issue taking into account the difficulties usually
associated with policy reform at EU level and the distortions
to competition and resulting inequality in the treatment of farmers
across the EU that might result from the implementation of different
policies and differences in support in different member states.
4. Also, and worryingly, the document fails
to present an accurate picture of the current CAP and its effects.
In this sense, the slanted use of statistical sources and the
failure to recognise the positive reforms already undertaken appear
as fundamental faults. These issues are developed in paragraphs
5-39 below.
5. The timing of the document (just before
the Hong Kong WTO Ministerial meeting and EU budget negotiations)
has only further contributed, through the reinforcement of certain
misconceptions, to unproductive controversies. Moreover, the lack
of a clear indication as to the audience (European or national)
and the ultimate objective of the publication further add to the
unease with which the NFU (and the farming community at large)
has received this document.
ANALYSIS OF
THE UK GOVERNMENT'S
DOCUMENT "A VISION
FOR THE
COMMON AGRICULTURAL
POLICY"
6. The document presents a vision for the
Common Agricultural Policy based on a number of objectives (document
para 1.5). Although these objectives are broadly accepted by the
NFU, the wording would gain from the introduction of further nuances
and clarifications. For instance, when referring to a sector that
should be "internationally competitive without reliance on
subsidy or protection", the document could benefit from the
recognition that the agricultural sector of the future also needs
to be profitable. Similarly, the document envisages a sector "rewarded
by the market for its outputs" but fails to mention the peculiar
character of agricultural markets and the role that agricultural
policy should have in addressing any potential failures. Furthermore,
the document fails to acknowledge the linkages and potential conflicts
between some of the objectives (eg will a sector "producing
to high levels of animal health and welfare" and "maintaining
and enhancing landscape" be also "internationally competitive
without reliance on subsidy or protection" or will "compensation"
for the additional costs brought about by higher standards be
needed?).
Domestic impact of the CAP
7. The document (paras 1.9 and 1.10) makes
a series of assertions concerning the cost of CAP. The arguments
presented are inconsistent, to say the least. Figures referring
to the cost of CAP are bandied about rather indiscriminately:
first we get the bold assertion that CAP costs €100 billion
each year (OECD) then a statement that, on "the most conservative
estimate", it will cost €100 billion over the period
2007-13—a difference by a factor of seven with respect to
the previous figure. This is then compared with the average household
gain of €5,700 from the single market over the period 1992-2002
but no actual data is to provided to effectively undertake the
comparison (figures provided related to different periods and
are expressed in a different way).
8. The document (Box 1.1, page 11 and also
pp 20-21) presents data that can be qualified as misleading. Firstly,
the OECD figures provided as an estimate of total costs associated
with CAP are meant only to be used as a comparison between countries
and for the purposes of a static analysis. Therefore, they should
not be used to put a value on the benefits from removing agricultural
policy. For instance, by considering these figures as costs of
CAP, the document fails to take into consideration the effects
that any elimination of protection would have on supply levels
and on prices. Also, it needs to be taken into consideration that
the figures refer in their majority to studies previous to recent
(substantial) reforms of CAP.
9. Secondly, the claim that CAP equals a
15% VAT rate on food is very confused. Certainly the consumer
cost is nothing like as high. In the UK the total food market
(excluding catering) is less than £100 billion and total
producer market returns are less than £15 billion. Should
the 15% VAT refer to the consumer cost of CAP, it would lead to
the somewhat nonsensical result that producer market become zero.
It remains, thus, unclear whether the 15% relates to both taxpayer
and consumer cost. Most crucially, it should be noted that the
figure has been obtained from a 1997 study that does not take
into consideration any of the successive crucial reforms that
CAP has undergone in recently. As such, this argument criticises
the "old CAP" and not the current state of affairs!
10. Thirdly, the reduction in total inflation
of 0.9% as a result of the elimination of CAP looks very exaggerated,
especially as, given the workings of the food supply chain, it
is very doubtful whether a downward shock will be fully transmitted
to consumers across the supply chain.
11. While it is true that food represents
a higher proportion of expenditure for people on lower incomes,
it is also the case that there is ample statistical evidence that
people on lower incomes levels consume a higher amount of processed
rather than fresh food. As such, it can be argued that the impact
of CAP on final prices must be put in the context of the relatively
small share that the cost of primary products represents on the
price of the final product.
12. On the issue of whether CAP is efficient
in delivering benefits to farmers (para 1.13 and ss and also p
22 and ss in the document), there is some truth in some of the
argument put forward, but a number of serious criticisms need
to be levelled. Firstly, a substantial part of the data used to
back the argument that only a small percentage of the support
actually reaches farmers refers to out-of-data analysis referring
to coupled payments (mostly eliminated in the EU post-CAP reform).[1]
Moreover, while we recognise the dichotomy landowner/farmer, it
also needs to be acknowledged that in the case of England, the
potential for capitalisation of the entitlement has actually been
increased by the specific form of implementation of CAP reform
chosen by DEFRA.[2]
Furthermore, it can be argued that there is also a contradiction
in the logic of the paper: on the one hand, the paper argues that
CAP results in a number of negative consequences (environmental
effects, effect on other countries, etc) because of its impact
on farmers and farmers' behaviour; on the other hand, the paper
denies that CAP has any real impact on farmers.
13. The paper goes on to argue (para 1.15
and p 26 and ss) that CAP is an inefficient policy at redistributing
income—this is undeniable, but the premise here is wrong:
CAP is not designed for that purpose and, as such, should not
be criticised for not achieving it. Moreover, we need to take
into account that the current system of decoupled payments are
part transitional/part land management payments, and in neither
of those roles is expected to have a social dimension.
Impact of the CAP on other countries
14. It is possibly the section of the document
dealing with the effect of CAP on other countries that some of
the strongest criticisms of the paper need to be raised. Firstly,
the paper argues (para 1.18) that farm tariff barriers are much
higher than for manufactured goods. While this cannot be denied,
it needs to be taken into consideration that while the process
of reducing manufacturing tariffs started in 1947, for farm goods
this started in 1994. On this trajectory it will take until 2050
to reach parity. Obviously, we would agree to a quicker process,
but the historical differences are not fully taken into account.
15. While the NFU would not dispute that
in some respects the CAP has had negative consequences for some
developing countries (para 1.20 and ss and p 51 and ss), the analysis
in these paragraphs is blatantly partisan, for a number of reasons.
Firstly, the document does not recognise that fact that the EU,
through Everything But Arms, has already opened all its markets
to Least Developed Countries (including most of Africa), with
the EU leading other developed countries.
16. Secondly, there is no consideration
that the many developing countries are net food importers. The
effect of eliminating export subsidies will be detrimental to
these, as it will increase food prices.
17. Thirdly, and very importantly, there
is no real examination of the issue of trade preferences and the
impact of the erosion of preferences on poorer countries. It is
significant that while the document argues for unambiguous trade
liberalisation, the UK Government has been prominent within the
EU in arguing for higher tariffs on bananas (all of which are
imported from developing countries) to maintain the preference
for our former colonial suppliers. It remains to be clarified
whether this dramatic change is due to the paper representing
a change in British Government policy or whether the Government's
position depends on the existence of domestic growers. Similarly,
the statement that "trade preferences have been of limited
value to developing countries" (p 55 of the document) seems
to contradict recent policy statements (such as the arguments
in favour of the granting of compensation to ACP countries for
their loss of preferences resulting from the reform of the EU
sugar regime).
CAP and the environment
18. On the environment front (para 1.24
and ss and p 29 and ss), the arguments are familiar ones, as the
paper follows the line that CAP has intensified farming and intensive
farming is responsible for environmental damage. These propositions
are not robust: they deserve proper analysis rather than being
presented as self-evident.
19. It is not clear that CAP has intensified
farming. The most intensive sectors (poultry, pigs, horticulture)
have had the lowest levels of support while sectors previously
highly supported are more extensive.
20. The argument that CAP has intensified
farming is undermined by previous assertions that most of the
value of support has gone to landowners and the supply industry.
If this has really been the case, the supposed pressure for intensification
would have been diluted.
21. The correlation between intensity and
prices is weak. Cereal prices have fallen dramatically in the
last decade but this has not reduced the intensity of production.
22. Although there is no denying that some
modern farming practices have caused environmental problems, the
one is not an automatic consequence of the other. Most indicators
point to significant environmental improvements in recent years,
mainly as a result of improved knowledge, techniques and technology.
It can be argued that the main causal link between environmental
degradation and farming is the quality of the management. This
is not necessarily linked to CAP.
23. As a further point, the environmental
arguments used in the paper concentrate on (a) resource protection
and pollution, and (b) bio-diversity. The NFU would not deny that
in some cases modern farming has caused problems in those areas
(although the causal link to CAP is much more tenuous). But opinion
surveys indicate that the public's main concern is landscape and
there is a generally positive recognition of the contribution
of farming in this area.[3]
Whereas it is dubious to ascribe the negative environmental consequences
of agriculture to CAP; it would be more tenable to assert that,
by keeping more land in farming than would otherwise have been
possible, CAP has had a (generally) positive effect on the countryside.
Implications of further CAP reform
24. On the policy structure for the new
CAP (see para 1.27 and ss), the NFU broadly supports the ambitions
put forward for the document. However, and despite our acceptance
of the transitional steps towards this structure, some important
issues seem to have been overlooked.
25. Firstly, any change to CAP needs to
be undertaken at EU level and implemented in the same manner by
all member states. Crucially, the paper fails to address how this
is to be achieved. As such, it fails to assess the feasibility
of the vision presented. This is particularly important given
the distortions to competition and inequalities in the treatment
of farmers across the EU that might result from the implementation
of different policies and differences in support in different
member states.
26. The document fails to recognise that
the potential effects of CAP reform will be conditional on whether
our principal trading partners, within the framework of current
and future WTO Rounds, also disarm their own trade distorting
support systems to ensure a "level playing field". Otherwise,
the future of the agricultural sector will be placed in jeopardy.
27. Any opening up of agricultural markets
will also need to take into consideration the regulatory environment
faced by the agricultural sector. As such, a review of CAP can
only be undertaken in conjunction with an assessment and/or review
of the regulatory regime in which farmers operate.
28. Any reform of CAP must recognise the
need for a properly functioning food chain, competitive and free
from abuse from dominant parties, allowing producers the opportunity
to be profitable and fully rewarding the production of competitive
high-quality produce.
29. The document attempts to exemplify the
potential benefits of liberalization by using the examples of
a number of countries, most notably New Zealand. These examples
are somewhat misleading as they refer to either partial processes
of deregulation (eg Sweden where, although price support was significantly
reduced at the beginning of the 90s, trade barriers remained at
a high level and where moreover, the long-term consequences of
the "experiment" did not materialize as the agricultural
sector became part of CAP) or to countries with markedly different
conditions to the UK. A case in point is that of New Zealand.
While it is fair to point to some of the similarities between
New Zealand and the UK, and some of the advantages enjoyed by
the UK (proximity to markets); some very significant differences
have been completely overlooked in the document.
30. The comparison with the agricultural
sector in New Zealand fails to acknowledge, among others, the
following factors:
— New Zealand agriculture is more productive
than the average of the rest of the economy, ie New Zealand has
a comparative advantage in agriculture. In that respect there
was an economic perversity in the pre-1984 subsidisation of NZ
agriculture. That is not the case in Europe.
— Agriculture in New Zealand is not
subject to the same regulatory pressures as in the UK, nor to
comparable levels of land prices.[4]
— Deregulation of New Zealand agriculture
took place at the same time as the rest of the New Zealand economy,
which gave significant advantages to agriculture in terms of transport,
the waterfront and inputs such as machinery prices. The same would
not be true in the EU.
— The ending of subsidies in New Zealand
coincided with the decision to devaluate the New Zealand dollar
by 20%. A similar devaluation of the £ in return for the
end of CAP support might be an attractive bargain for British
farmers, but it is not a realistic policy option.
31. On the issue of whether agriculture
can prosper in a free market, and focusing on the issue of risk
management, it is true that farmers do manage risk in a variety
of ways. But the document itself implicitly recognizes (see paras
3.14-3.23) that a number of factors can potentially prevent farmers
from engaging in these activities (eg lack of future contracts
for some commodities, lack of information, etc). Given the lack
of market instruments, it is easy to envisage an institutional
role in order to address the market failure/absence. This is more
the case in view of the potential consequences (social, economic
and environmental) that land abandonment could have.
32. When referring to the part that farmers
should play in this process of reform (paras 3.22-3.25), the document
stresses the scope for efficiency gains. The NFU recognises that
this scope does exist; this view, however, is over-simplistic
and fails to recognise that differences in performance are significantly
explained by physical differences between areas. As such, to argue
that efficiency levels across the country should converge is tantamount
to arguing that agricultural activity should not be undertaken
in areas such as LFAs—the obvious economic, environmental
and social consequences of such an outcome cannot be obviated.
33. The document explores the link between
agricultural activity and the economic performance of the rural
economy (paras 3.29-3.37). While recognizing the linkages between
agriculture and other economic activities, the assessment that,
so far, a decrease in the number of people employed in the agricultural
sector has not been mirrored on the number of people employed
in related industries is over-simplistic. Firstly, a minimum level
of economic activity (or "critical mass") is required
in order to maintain activity in those industries linked to agriculture.
Thus, the lack of link between agricultural employment levels
and levels of employment in related industries does not disprove
the strong links between a healthy agricultural sector and the
performance of related industries.
34. The link between agriculture and other
activities is not necessarily established through the number of
people employed in the agricultural sector but through other factors,
such as the level of production (eg transforming activities) and/or
the area devoted to agricultural production (eg tourism). The
NFU firmly believes that any abandonment of production can have
crucial consequences on those industries directly or indirectly
dependent on agriculture (or on industries dependent on those)
and that this is not recognised in the document.
35. Although we can accept some of the arguments
given in the paper concerning food safety and security (para 3.38
and ss), some of the arguments on food security seem misplaced.
For instance, the paper states that barriers to entry in agriculture
are low—as such, that would mean that if there were food
security concerns, prices would rise and people would return to
agricultural production. However, barriers to entry in the agricultural
sector are not low, with not only sunk costs but also skill levels
being an important issue.[5]
That would also have an impact on environmental stewardship.
36. A slump in domestic agricultural production
would send shock waves up the entire food chain, doing enormous
damage to the UK's multi-billion pound food manufacturing sector
as well as driving farmers out of business. While we can expect
some of the food manufacturing to continue in this country regardless,
a significant part will move off-shore if raw materials are not
available in this country.
37. Although some voices argue that food
security was a concern in the third quarter of the last century
due to a combination of factors that are unlikely to recur, we
must acknowledge that recent developments in areas such as climate
change, geopolitical events and pandemic health scares, should
be kept under close review and need to inform any potential policy
review. Food security concerns also need to play a role in the
design of any future agricultural policy.
CONCLUSIONS
38. Farmers are still acclimatising to the
largest ever reform of CAP. To present, at this stage, plans for
future reform without sufficiently analysing the current situation,
the feasibility of the proposals or their effects on competitiveness
appears hasty.
39. Environmental issues (notably climate
change), food security concerns, landscape management issues and
the role of farmers in rural communities need to be fully considered
when assessing the feasibility of any proposals. Similarly, the
important links of agricultural with other economic sectors should
be carefully analysed.
February 2006
1 Incidentally, the paper continually refers to how
post Fischler reform, around half of the support provided to EU
farmers is still in the form of market price support. This figure
is somewhat misleading and does not recognise the great transition
from coupled to decoupled payments (the EU Commission estimates
that by 2006 some 90% of direct payments will be decoupled) and
makes certain (questionable) assumptions as to the extent to which
market mechanisms such as intervention prices or export subsidies
influence prices. Back
2
By choosing (against the opinion of, among others, the NFU) a
system where, by 2013, all entitlements within each English area
(England SDA Moorland/England SDA non-moorland/England non-SDA)
will be worth the same and, therefore, discouraging trade, the
regional averaging system encourages the capitalisation of entitlements. Back
3
CPRE survey in 2004 identifying working farms as the main feature
associated with the English landscape. Back
4
Capitalisation of support may explain the difference in part;
but the main factor is land availability and population density,
as a comparison between land prices in the Netherlands (high);
the UK (medium) and France (low) under a common support system
demonstrates. Back
5
This is especially the case as lack of skills has frequently
been identified as one of the problems being faced by the agricultural
and land management sector in the UK. Back
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