House of Commons - The Common Agricultural Policy after 2013 - Environment, Food and Rural Affairs Committee

The Common Agricultural Policy after 2013 - Environment, Food and Rural Affairs Committee Contents

10 Increasing the competitiveness of EU agriculture

192. The Commission's Communication states that reform of the CAP is needed "to retain and enhance competitiveness in a world characterised by increasing globalisation, and rising price volatility".[319] The growing world population and the expansion of global markets means this is a time of opportunity for EU farmers—but also of challenges, not least the need to be competitive on a global level while managing the increasing costs of inputs, such as oil, fertilisers and water.

193. Enhancing and nurturing EU agricultural competitiveness should be central to the Commission's proposals. However, the CLA said the Commission had "no new ideas",[320] and the NFU warned that some of the Commission's proposals "represent a tactical, rather than strategic move that could harm competitiveness".[321] The Agriculture and Horticulture Development Board (AHDB) agreed that "some of the proposals could hamper the ability of the UK agricultural sector to be competitive in both the EU and global market".[322] Dairy UK felt the Commission actively discriminated against "the type of commercial farming that has developed in the UK".[323] Defra acknowledged that "the Communication fails to articulate the ambition needed to promote EU agricultural competitiveness and risks missing an opportunity to put in place reforms to make the progress required by 2020".[324]

194. The Government "wants to see a more innovative, self-reliant, profitable and competitive UK and EU farming industry with the ability to mitigate or withstand shocks and to recover quickly from them".[325] Defra's ambition of weaning farming off public subsidy relies on finding ways to increase the competitiveness and viability of EU agriculture. However, when questioned, the Minister was unable to offer any new policy tools to enhance competitiveness, except for suggesting greater flexibility in how Pillar 2 resources could be deployed and reiterating that the Single Farm Payment would have to go down in future. He told us "it is not for governments to determine that sort of detail".[326]

195. The Commission's Communication is lacking in both vision and detail as to how it intends to enhance the competitiveness of EU agriculture. While Defra is highly critical of the Commission's lack of vision, we did not find the Minister's own answers as to how the competitiveness of EU agriculture is to be increased particularly convincing. We urge Defra to present the Commission with an alternative vision and supporting measures, drawing on the ideas in this report.

196. Currently, Defra spends only 10% of its budget for the Rural Development Programme England on Axis 1—measures for competitiveness.[327] The Minister has previously agreed that this balance is far from ideal, stating "certainly if we were to succeed in 2013, as I would hope so, in getting a bigger share of the Rural Development Programme, which the UK should have, I would want to revisit those percentages".[328]However, in evidence to this inquiry, he would not confirm this commitment, stating only that "our two priorities will be the environment and competitiveness".[329]

197. Rebalancing the allocation between Axes in Pillar 2 would allow more measures that assist UK producers to become more competitive to be funded. Defra has chosen not to implement measures in England which are available in other Member States, for example, to help young farmers or support early retirement or to help producers meet new EU standards.[330] The Andersons Centre said new entrants schemes should be available,[331] and the CLA and NFU called for measures to help farmers meet the costs of new EU environmental regulations, such as on Nitrate Vulnerable Zones.[332]

198. In England, the competitiveness and rural livelihoods elements of the Rural Development Programme (Axes 1 and 3) have been delivered through the Regional Development Agencies (RDAs). We are concerned that the abolition of RDAs (by March 2012) will compound the difficulties farmers and local communities already encounter in receiving information and accessing funding.[333] In February 2011, the Minister announced that the responsibilities of the RDAs with respect to the RDPE would transfer to Defra alongside changes to the governance structure and the geographical distribution of regional offices.[334]

199. After 2013, we urge Defra to revisit its balance of funding between the three axes of the Rural Development Programme to channel more funds into measures to enhance competitiveness, currently Axis 1 of Pillar 2. Given that the mechanism for delivery of the socioeconomic elements of the RDPE will have to change, there needs to be sufficient warning as to how funds will be administered so that those who qualify are able to access them.

Research and Knowledge Transfer

200. Strengthening agricultural Research and Development (R&D) coupled to more effective Knowledge Transfer were seen by many witnesses as the key to improving both the competitiveness and sustainability of agriculture.[335] The Society for Biology said:

Research, knowledge and trained people are vital to develop and deliver sustainable agriculture and effective agricultural policy [...] We have major technical and scientific challenges to overcome if we are to develop a sustainable CAP that reflects multiple demands for food security and productivity, improved environmental quality and better social health, wealth and welfare. However, there is currently inadequate investment in all forms of agricultural training and research, and a dearth of suitably qualified and skilled people.[336]

The NFU suggested "we can look ways of incentivising smart use of modern technology, whether it be precision farming technology, smarter buildings for housing livestock or anaerobic digestion".[337] The Minister agreed that the way to achieve sustainable intensification of agriculture "is about research, developing new technology and, indeed, spreading that technology out into the farming industry. One of the things that we would like to see from the CAP is the opportunity to use more of the Pillar 2 money in that regard".[338]

201. The Commission's Communication refers to knowledge transfer as one of the available tools but gives no information on what form this would take or the level of funding. The Commissioner told us that the post-2013 CAP would have new financial instruments "to encourage farmers and the agri-food industry to take the results from the research and to put them into practice" and said there should be greater partnership between research organisations and farming groups.[339]

202. There are some existing provisions in the CAP for knowledge transfer and extension activities. Since 2007, Member States have been obliged to set up Farm Advisory Systems (FAS), primarily aimed helping farmers understand and meet cross-compliance requirements.[340] However, a recent review of the FAS found its effectiveness is limited by the low number of farmers seeking advice (only 5% in 2008) and also by the restricted scope of the advice offered as in about half of Member States the FAS focuses strictly on cross-compliance rather than on broader issues of competitiveness or sustainability.[341]

203. In England the AHDB, which has an income of about £50m annually, undertakes research and knowledge transfer activities.[342] Much of its work is contracted out to ADAS, formerly the Ministry of Agriculture, Fisheries and Food (MAFF)'s Agricultural Development and Advisory Service, which was privatised in 1997. ADAS have said that privatisation resulted in work being less 'joined-up' with some areas being neglected, and a reduction in extension services to individual farmers.[343] Extension services are also provided by representatives from the input industries, however there is a concern that these do not provide impartial advice.[344] Defra did not believe that changes to the existing measures in Pillar 2 were needed to better assist farmers to make use of new technologies, but rather argued for "a shift away from the Axis approach to more easily facilitate use of different measures to achieve multiple outcomes" and "consideration to be given to the potential for novel financial instruments, including loan funds, to maximise the impact of the available public funding".[345]

204. It appears that, both in England and more broadly in the EU, knowledge transfer and extension services are not being provided as much or as effectively as they might. There is a clear role for Government in improving the delivery of these services in research areas that deliver public benefits through contributing to food and environmental security. Research, development and innovation are vital to achieving the science-led sustainable intensification that will be needed to meet global challenges. The CAP post-2013 must place a greater emphasis on knowledge transfer and farm extension services. The Commission should consider strengthening the Farm Advisory System and expanding its remit to include competitiveness and sustainability.

Improving the functioning of the supply chain

205. The Commission's Communication suggests that the poor functioning of the food supply chain is jeopardising the long-term prospects of the agricultural sector.[346] It draws attention to the steadily decreasing trends in farmers' share of the value added by the food supply chain, which fell from 29% in 2000 to 24% in 2005. Recent analysis of the British pig industry by the British Pig Executive provides an example of this trend: between November 2010 and January 2011, retailers and processors made £192m and £100m respectively in profit from pork products while producers lost £35m.[347]

206. According to the Commission, reasons for farmers' weak position in the food supply chain include the imbalance of bargaining power along the chain, fragmentation of the farming sector, lack of transparency around prices, and the functioning of the agricultural commodity derivatives markets.[348]

207. The Commission's intention to address farmers' lack of value share and the imbalance of power in the food supply chain was shared by many witnesses.[349] The Scottish Agricultural College said "it is essential that across the food supply chain, a more equitable and stable distribution of value is obtained".[350] The NFU stressed that a properly functioning supply chain was an essential step to reducing farmers' reliance on subsidies.[351] We also note the recent complaints by pig producers that the rising price of feed is not being reflected in the prices paid by retailers and processors.[352]

208. The British Retail Consortium (BRC) told us that retailers already "work closely with their supply chains and have a good knowledge of farming costs and will factor that in to their decisions on price".[353] Instead, the BRC blamed problems in the dairy industry on other "large parts of the food sector", including Government, hospitality, catering and processing, that were not willing to enter into dedicated supply chains.[354] Nonetheless, a recent investigation by the investment bank UBS into food price inflation highlighted potential imbalances of power in the UK food supply chain. The UBS report found that UK food inflation was more than twice the average in the eurozone and concluded that it has significantly outstripped food retailers' cost inflation. They said this could allow UK politicians to suggest that food price inflation is 'unfair' or 'excessive'.[355]

209. The Commission's Communication advocates improving the functioning of the supply chain but fails to suggest any concrete measures to achieve this. One option would be to extend the proposals to improve contractual relations in the dairy sector (the 'Milk Package') into other sectors.[356] The NFU were supportive of the ideas in the Milk Package.[357] The NFU further suggested that imbalances across the supply chain could be corrected by supporting producer organisations, creating more market transparency, improving farmers' marketing and promotion skills, but also not impeding consolidation of farming businesses.[358] The AHDB said greater market transparency and longer-term contracts were needed in the dairy sector.[359] The TFA argued that the direct payments were needed to compensate farmers for their weak position in the supply chain.[360]

210. In the UK, contractual relations along the food supply chain are covered by the Groceries Supply Code of Practice (GSCOP) that came into force on 1 February 2010. The GSCOP gives suppliers access to independent arbitration and protects them from practices such as being asked to cover the cost of theft. It covers the ten biggest grocery retailers—those with annual sales of over £1bn. The GSCOP was set up following a recommendation by the Competition Commission, which also recommended the establishment of an ombudsman to levy penalties on large grocery retailers for non-compliance.[361] The Government intends to publish a draft Bill setting up the Grocery Code Adjudicator (GCA) under the aegis of the Department for Business, Innovation and Skills shortly, possibly in May 2011.[362]

211. Most witnesses agreed with the need for an ombudsman (or adjudicator) to enforce the GCSOP.[363] The TFA believed that "the introduction of such a function is long overdue and whilst it will not in itself solve all the supply chain problems, it will be of significant benefit".[364] The Food and Drink Federation also said there should be "an early introduction of the Adjudicator".[365] However, the BRC wanted to wait and see how the GSCOP was working before "rushing into" bringing in an Adjudicator.[366]

212. Imbalances in the supply chain result in poor returns to farmers, reduce their profitability and prevent them becoming less reliant on the single farm payment. The Commission has recognised this but has failed to provide concrete suggestions for improving the situation. Defra must ensure that the Commission's intentions are taken forward and expanded in the draft legislative proposals for the post-2013 CAP.

213. It appears that supermarkets' prices do not fully reflect changes in the costs incurred by businesses further down the supply chain and livestock farmers feel their livelihoods are at risk as a result. We urge Defra to work across Government to ensure that the forthcoming Grocery Code Adjudicator has sufficient powers to enforce the Groceries Supply Code of Practice and protect the interests of UK farmers.

Price volatility and market management measures

214. Food price volatility has increased in the past few years.[367] On 3 March 2011, it was announced that the FAO Food Price Index (FFPI) had risen for the eighth consecutive month, reaching its highest level (in both real and nominal terms) since the index began in January 1990.[368] Although the Foresight Future of Food and Farming report concluded that it was "very difficult to predict" whether food price volatility would increase in future,[369] there is a widely-held concern that volatility will increase. The Commission's Communication states "the perspectives for agricultural markets are expected nonetheless to be characterised by greater uncertainty and increased volatility".[370]

215. Volatile prices are detrimental to consumers, producers and government. They can cause social instability, distort investment decisions and hinder fiscal management as well as increasing the risk of hunger or poor nutrition when prices rise.[371] However, interventions to reduce price volatility (such as export bans or national food reserves) can be expensive, politically difficult, and risk exacerbating the problem through distorting world trade and preventing transmission of market signals.

216. The market measures elements of the CAP are one way to manage price volatility, for example through intervention buying, private storage and export subsidies when prices fall very low; the CAP is less well-equipped to deal with high prices.[372] The percentage of the CAP budget spent on market measures has fallen from 74% in 1992 to less than 10% at present.[373] The EU's use of export subsidies has been criticised internationally in the past for their effects on agriculture in developing countries. The Commissioner emphasised to us that this was no longer the case, saying : "I just want to underline the fact that export subsidies represented last year, in 2010, only 1% of the total budget of the CAP, so how can we say that the Common Agricultural Policy has an influence on agriculture in other parts of the world?"[374] During negotiations on the Doha Development Round, the EU committed itself to phasing out export subsidies.

217. The Commission's Communication gives three options for the future of market measures (Box 6).

Box 6: The Commission's proposals for market measures in the post-2013 CAP
Option 1

Streamline and simplify existing market instruments where appropriate
Strengthen risk management tools

Option 2

Improve and simplify existing market instruments where appropriate
Strengthen existing risk management tools
introduce an optional WTO green box compatible income stabilization tool to compensate for substantial income losses

Option 3

Abolish all market measures, with the potential exception of disturbance clauses that could be activated in times of severe crises

218. Defra's position is that price volatility is best managed by encouraging the development of market based solutions (such as futures markets or insurance), emphasising that these should be based in the private sector rather than publically subsidised.[375] It called for the phasing out of export subsidies and reduction of intervention prices in dairy and cereal sectors to levels commensurate with long term lows. From this, it would appear that Defra aligns more with the Commission's Option 3 although this is not explicit in their response.

219. Market measures are likely to be a highly divisive issue in Europe. George Lyon MEP pointed out that some Member States saw the current high levels of price volatility as a justification for a return to greater market intervention and price control.[376] Our evidence suggests there is no desire among UK interested parties to expand the existing market measures but there was support for retaining some measures as a safety-net.[377] The NFU and TFA also argued that direct payments helped farmers cope with price volatility.[378] The Pack inquiry into Future Support for Agriculture in Scotland supported the use of market-based risk management instruments such as futures markets to help farmers manage price volatility, but also warned that these would be difficult for small businesses to access.[379] Similarly the TFA expressed concerns about the complexities of these sort of instruments and the problems faced by short-term tenants in using futures contracts.[380]

220. In January 2011, the Commission developed its ideas on the "income stabilisation" tool referred to under Option 2.[381] We have not taken evidence on this tool specifically. However, we note the general principle that any tool must be simple to implement and should not distort the market within the EU, which argues against a high degree of flexibility in implementing the tool. We are also concerned about the potential ramifications for budget discipline of this sort of insurance mechanism and the potentially high administrative cost of auditing farmers' eligibility for compensation.[382]

221. Defra should resist any attempt to use current price volatility as a justification for re-establishing significant market management measures, including excessive price support or quotas. We welcome the reduction in the use of export subsidies and strongly recommend that they be removed from the CAP after 2013. There will continue to be a role for intervention buying in the CAP after 2013, but only as a safety net in times of genuine crisis.

222. We note that tools such as futures markets help some farmers manage price volatility, but we are concerned that smaller producers in particular will be unable to benefit from them. If Defra wishes to continue to promote these tools, particularly as a replacement for current market measures, it must ensure that they will be accessible to all farmers and that guidance and training on using them will be available.

319 The CAP towards 2020, p 6. Back

320 Ev 171 Back

321 Ev 119 Back

322 Ev 161 Back

323 Ev w16 Back

324 Ev 172 Back

325 Ibid. Back

326 Q 465 Back

327 http://www.defra.gov.uk/rural/rdpe/secta.htm#q2 Back

328 Farming in the Uplands, Q 211. Back

329 Q 487 Back

330 Defra, Rural Development Programme England Programme Document, 2007, Ch 5. For example, France, Germany, Denmark, Italy and Spain offer early retirement and support to young farmers, Italy and Spain also offer help to comply with EU standards. Back