HC 671 The impact of Common Agricultural Policy Reform on UK Agriculture

Supplementary written evidence submitted by Alan Swinbank (CAP 09A)

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’. [1]

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. [2] 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. [3] 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 twenty 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