Supplementary written evidence submitted
by Professor Alan Swinbank
RESPONSE TO
THE COMMITTEE'S
SUPPLEMENTARY QUESTIONS
Question 1. Your evidence referred to the
likely increase in global food prices in future. Is it inevitable
that farmers' profitability will increase as a result of these
increases? Or is it likely that prices will rise in line with
costs, or that any profits will accrue later down the supply chain?
1.1 There are two sides to the equation. Analysts
are concerned about rising costs (for fuel, agrochemicals, labour,
etc), and potential future cost increases associated with global
warming. Consequently, simply to stand still, commodity prices
need to increase. Not all farmers will be equally affected: those
heavily dependent on the inputs with the highest cost pressures
will be squeezed; whereas those less dependent on these inputs
may see their margins increase.
1.2 The more fundamental issue, however, would
appear to be a concern that demand increases—more mouths
to feed, changes in diet in China and India in particular, biofuels,
etc—could outstrip the world's capacity to produce more.
This needs to be matched by an increase in supply, which will
only be forthcoming if an appropriate price signal is passed back
to farmers, and they produce more. If higher prices did not
feed back to farmers, and no more was produced, then the price
mechanism could only bring demand back into line with available
supplies by pricing the poor out of the market.
1.3 Some of the benefit of higher prices will
doubtless be captured by trading and processing companies along
the food chain. Farm costs will increase: more machinery and agrochemicals
will be bought, profit margins for supplying firms will strengthen,
and landlords will seek to charge higher rents for new tenants.
Long-standing and well established farm businesses stand to gain
in this scenario; but many farmers will remain on the profitability
margin, dependent upon on a continuation of high farm-gate prices
to cover their costs and borrowings, and vulnerable to any future
downturn in profitability. So I suspect the European Commission
will find cause to lament about depressed farm incomes well into
the future.
1.4 My concern is with the millions of consumers
who are pushed into poverty as a result of an increase in food
commodity prices. The World Bank has just reported that its "Estimates
of those who fall into, and move out of, poverty as a result of
price rises since June 2010 show there is a net increase in extreme
poverty of about 44 million people in low- and middle-income countries".[17]
Question 2. The Jongneel et al. study (2007)
looked at the effects of cross-compliance on trade balance. Would
it be fair to conclude from this study that the "cost"
of cross-compliance is less than the "compensation"
from the single farm payment?
2.1 I presume this refers to the report Compliance
with mandatory standards in agriculture: A comparative approach
of the EU vis-à-vis the United States, Canada and New Zealand
published by the Agricultural Economics Research Institute (LEI)
in The Hague.[18]
I was not familiar with the study, but I have now glanced at its
conclusions.
2.2 The report focuses on the cost of statutory
management requirement (SMRs), such as the Nitrates Directive,
and the additional costs associated with the good agricultural
and environmental condition (GAEC) provisions of cross compliance.
The conclusions do not highlight any numbers, but it is reported
that: "The (additional) costs of cross compliance associated
with the GAECs is found to be rather low. A lot of farms (animal
holdings) will probably face no costs at all, where others (arable
farms) might face some costs, in particular costs associated with
maintenance activities (soil cover, erosion control). These will
be generally low, and often wholly or partly offset by additional
returns" (p. 112).
2.3 It does report that "costs of compliance
with the SMRs can be significant. In particular the costs associated
with the Nitrate Directive and Animal Welfare requirements could
have serious impacts". It had earlier suggested, however,
"The SMRs which are part of cross compliance are all pre-existing
legislation, and costs associated with complying should be primarily
attributed to this legislation and not to cross compliance. (Additional)
costs are expected to be minimal unless measures need to be taken
to comply with SMR standards that were previously (partly) ignored"
(p. 112). I would agree with this, and thus I do think it is reasonable
to conclude from this study that the "cost" of cross-compliance
is less than the "compensation" from the single farm
payment.
2.4 It might also be pointed out that farmers
in nitrate sensitive areas do not receive an enhanced Single Payment
because of the extra compliance costs they face.
2.5 Whilst farmers in the New World might not
face similar SMRs, this reflects in part the New World's lower
population and farming intensities: "Lower regulation intensity
however, does not necessarily imply a higher level of environmental
degradation, biodiversity loss, or harm to animal welfare"
(p. 113). A country's comparative advantage can stem from a number
of sources: more fertile soil, more reliable rainfall, lower labour
costs, or a lower regulation intensity.
Question 3. Would removing the single farm
payment mean that food prices would need to go up to pay for the
extra environmental and animal welfare standards imposed in the
EU?
3.1 This question might be rephrased as: is
the single farm payment decoupled?; an issue also addressed
in paragraph 5.5 below. If it is fully decoupled then the output
of European agriculture should not be affected by its removal;
but very few observers appear to believe that.
3.2 Consequently there might be some contraction
in supply of products subject to tough environmental and animal
welfare standards if the Single Payment Scheme was abolished.
This would lead to some (small) increase in world market prices,
and in EU prices where these are effectively linked to the world
market. If that price linkage were absent—with import barriers
effectively prohibiting imports for example—there would
be a more marked (positive) impact on EU prices, helping producers
recoup their costs. Furthermore, if the product is sufficiently
differentiated in the eyes of consumers, and if this is
a preferred product that consumers are willing to pay for, then
again the market could deliver the revenues required by EU farmers.
Question 4. Which Directorate-Generals in
the EU Commission have responsibility for determining how open
the EU agricultural market is to world trade? Do you understand
the Commission's Communication to be proposing any specific measures
that would affect how open the EU market is to world trade (aside
from the overall level of subsidy)?
4.1 All the Commissioners, acting collectively
as the College of Commissioners, are jointly responsible for trade
policy, and each has the possibility of contributing to the debate.
However it is the Commissioner for Trade, Karel De Gucht, and
the Directorate-General for Trade over which he presides, that
takes the lead and has prime responsibility. During earlier GATT/WTO
trade negotiations, former Agriculture Commissioners Ray MacSharry
and Franz Fischler took prime responsibility for the agriculture
dossier, but that practice seems to have lapsed some years ago.
4.2 The Commission's Communication, The CAP
towards 2020: Meeting the food, natural resources and territorial
challenges of the future (COM(2010)672), makes little mention
of world trade, and what it does say is fairly neutral. On page
4 it notes that it is essential that the EU respects its commitments
in international trade, and later on the same page it talks about
the possible conclusion of the Doha Round and of bilateral and
regional trade agreements under negotiation. On page 7 it notes
that European farmers face competition from the world market,
whilst "having to respect high standards relating to environmental,
food safety, quality and animal welfare objectives requested by
European citizens" (I presume that the use of the word
high, rather than higher, was intentional). So the
direct answer to the question is: No, no specific proposals.
4.3 By contrast, the Commission's consultation
document (The Reform of the CAP Towards 2020: Consultation
Document for Impact Assessment) issued at about the same time,
has a quite different feel (and appears to have been written by
different people). In this document the European Commission, to
my mind, adopts a more open and positive approach. In particular
on page 8 it says: "The EU will continue its efforts to
seek the conclusion of an ambitious, balanced and comprehensive
agreement in the Doha Development Round. As part of an overall
package deal, the EU has indicated its readiness to accept a steep
reduction in the ceiling on its trade-distorting subsidies, the
elimination of its export subsidies and a significant reduction
of its border protection. In parallel, the EU will actively pursue
its agenda of bilateral or regional trade negotiations, which
come as a complement to the multilateral ones. This means that
the EU agricultural sector will be exposed to growing pressure
and volatility of prices and income and, as a result, production
is likely to adjust. At the same time, new trade agreements provide
opportunities for EU agricultural exports. And EU role [sic] in
world agriculture makes it an important actor in the global standard
setting for sustainable agricultural production and consumption".
The last sentence does suggest that the European Commission would
like to negotiate new international standards, on animal welfare
for example, but gives no hint that it would unilaterally seek
to reduce trade access. Would the real European Commission identify
itself please!
Question 5. The economist, Josef Stiglitz,
said recently that EU agricultural subsidies were responsible
for underinvestment in agriculture in developing countries, and
therefore for the current high food prices. With the modern structure
of the CAP, is this still the case?
5.1 Joseph Stiglitz, formerly chief economist
at the World Bank, is an able, and politically astute, economist,
whose opinions I respect. On the Today programme on Radio
4 on 19 January 2011, talking about the current spikes in food
commodity prices, he did indeed suggest that one of the contributory
factors had been underinvestment in agriculture in developing
countries, and that one of the reasons for this had been the "high
subsidies" to agriculture, particularly in the US and Europe.[19]
I would not disagree with his comments in the broadcast. Most
of his interventions related to US farm policy.
5.2 The "old" CAP of market price support
undoubtedly distorted world markets, leading to underinvestment
in agriculture in many developing countries; but they too were
capable of pursuing policies that discouraged investment in their
domestic farm sectors! The EU policy for sugar was particularly
grotesque and Byzantine. Efficient agricultural exporters competed
against subsidised EU (and US, and other) production, which reduced
their incentive to invest. Net food importers, in the short-term
at least, benefited from depressed world market prices, but this
discouraged investment in the agricultural sector with a longer-term
impact. Because of the EU's high tariffs, preferential access
to the EU's highly-priced market (for example for sugar and bananas)
could be offered to preferred suppliers in the developing world
(for example under the old Lomé Convention for the African,
Caribbean and Pacific (ACP) states, and more recently under the
Everything but Arms initiative for the least-developed
countries). This, arguably, encouraged perverse investments in
these sectors that could not be sustained in the longer term;
and a number of such economies are now facing severe adjustment
problems as a consequence of EU policy change.
5.3 But as your question rightly notes, the CAP
of 2011 is rather different to that of 20 years ago. Can the same
criticisms still be levelled at today's CAP?
5.4 Inflation and policy reform have reduced
not only real but also nominal support prices. Consequently, given
today's buoyant world market prices, export subsidies are no longer
relevant; and it is likely that export subsidies will be prohibited
in a post-Doha WTO trade regime.
5.5 The bulk of support has switched to the supposedly
decoupled Single Payment Scheme. In theory, this (and other Green
Box measures pursued by the EU under its Rural Development Programme)
has minimal impact on production, and hence on the trading interests
of other countries. Many developing countries, non-the-less, are
extremely dubious about this claim, and say that they believe
EU policy still distorts world trade. Short of abolition of all
farm support in the EU, however, it is difficult to see how much
more decoupled the policy could be.
5.6 The main element still protecting EU agriculture
is the high tariffs that are applied, which in some instances
are prohibitively high. These means that efficient exporters elsewhere
have difficulty selling into the EU market; and that prices in
the protected EU market are often well above those on world markets,
thus stimulating EU production. Consequently the charge that the
CAP still distorts world trade is still valid—though much
less valid than it was—and this may well impact on investment
decisions in developing countries. A successful conclusion to
the Doha Round would do much to address, but not eliminate, this
distortion.
5.7 European policy-makers should perhaps also
consider the shadow that the CAP still casts over the world
scene. Governments and investors in developing countries will
be reluctant to invest in agricultural projects if they remain
unsure about the effects of EU (and US, and other) farm policies,
or fear that the EU may rescind its current commitment to decoupled
support.
18 February 2011
17 Food Price Watch, February 2011: http://www.worldbank.org/foodcrisis/food_price_watch_report_feb2011.html,
accessed 17 February 2011. Back
18
http://edepot.wur.nl/42429, accessed 17 February 2011. Back
19
http://news.bbc.co.uk/today/hi/today/newsid_9366000/9366168.stm,
accessed 17 February 2011. Back
| 
