The impact of Common Agricultural Policy Reform on UK Agriculture

Written evidence submitted by Dr Joan Moss (Principal Agricultural Economist, Agri-Food & Biosciences Institute and Senior Lecturer, Queen's University Belfast) (CAP 27)

I wish to state that the views expressed are solely my own.

Background/General Comments

The FAPRI-UK econometric modelling system captures the dynamic interrelationships among the variables affecting supply and demand in the main agricultural sectors of England, Scotland, Wales and Northern Ireland and is fully incorporated within the University of Missouri's FAPRI EU model which, in turn, is linked to their world model. It thereby yields UK projections (not forecasts) that are consistent with equilibrium in the EU and the rest of the world. The modelling system is re-estimated and validated annually, in conjunction with industry experts, and then simulated under assumptions that current policies remain in place, specific macro economic projections hold and average weather conditions apply. This generates ten year Baseline projections of key variables for each country of the UK and the Baseline in turn provides a benchmark against which projections derived from policy scenarios can be compared and interpreted.

Such a complex mathematical modelling system generates copious results. The policy analysis must, however, be treated with caution. It does not forecast future prices and production levels but provides indications of the likely proportional changes in key variables such as producer prices resulting from specific changes in policy or combinations of new policy measures, when compared against the Baseline Benchmark.

Over the past 13 years, the FAPRI-UK Policy Analysis team at AFBI and Queen's University Belfast have analysed successive CAP and trade policy proposals including: the impact of the rolling out of the previous CAP Health Check reform; the elimination of dairy quotas; various WTO Doha trade liberalisation scenarios; and the Treasury/Defra's Vision for the CAP on UK agriculture (similar to the most radical current EU Commission CAP reform proposal embodied in Option 3). The impacts of exchange rates, the EU market for liquid biofuels and greenhouse gas emissions have also been investigated.

The three CAP Reform Options provide 'something for everyone' so until the final agreement is reached it is not possible to determine what form the new CAP reform measures will take. Option 3 includes phasing out of the Single Farm Payment (SFP), abolition of all market measures other than in exceptional circumstances and channelling of CAP funds into climate change and environmental initiatives. In my opinion, this option is unlikely to win sufficient EU support to be adopted, whereas significant elements of Option 2 may secure agreement. Option 1, which entails the most modest reform with more equitable SFP across the EU could, however, be the fallback option if agreement cannot be reached on Option 2 details such as method to determine EU-wide area-based payments, definition of active farmers, simplified market management tools and the greening of the Second Pillar measures.

In addition to the FAPRI-UK sectoral analysis, I have also been engaged over a number of years in farm-level micro analysis using representative farm programming models with colleagues in AFBI and University College Dublin and this work has also influenced my views on policy reform.

How will the Commission's proposals affect the ability of UK agriculture to be competitive in a global market?

Competitiveness of UK agriculture in a global market is determined by our absolute/relative comparative advantage. This in turn is influenced not just by the efficiency of agricultural systems of production, which is determined by the technology adopted, factor costs and management efficiencies, but also by exchange rates. A strengthening of Sterling can eliminate a previously competitive position at a stroke.

UK labour and land costs are significantly higher than in many competitor countries, particularly out with the EU, and modern agricultural technologies, other than those associated with Genetically Modified 0rganisims, often require a scale of production that may incur local resistance (e.g. large scale dairy units) or is not commensurate with current farm structure.

The 'stickiness' of the land market (land owners may be rational retaining ownership even if they no longer wish to farm, as land has proved to be a better repository of a farming family's wealth than alternatives) may impede the structural change that occurs in other sectors in response to competitive pressures.

The level of production in a globally competitive UK agriculture would not necessarily even match current levels.

Do the proposals ensure fair competition for British agricultural products within the European Union?

A major policy determinant of UK agriculture's competitiveness within the EU will be the degree of renationalisation of support measures.

Many Member States and latterly the EU Commission have expressed the desire to provide significant 'income support' to their farmers on social/rural development grounds, especially smaller farmers or those in disadvantaged regions.

The reintroduction of the term income support, a concept not articulated in the recent CAP reforms, highlights a reversal in the momentum which had been created since the McSharry reforms of the early 1980s.

Any renationalisation that results in direct or indirect augmentation of the financial flows to farmers in other Member States not received by UK farmers will undermine the competitiveness of UK agriculture within the EU.

The UK has already fully decoupled so will not be significantly affected by full decoupling, other than by a small positive price impact, compared to those Member States that still have to decouple.

Will the proposals achieve the correct balance between productivity and sustainability?

Productivity and sustainability do not have to be considered in the context of a trade-off.

While it is hoped that policy will not hamper the attainment of efficient utilisation of farm resources, as outlined in the following sections, the deployment of a farm's resources cannot be considered efficient if it results in the long-run degradation of the land or local ecosystem.

Likewise, if social sustainability e.g. in remote/upland areas, is a political objective then attaining what is essentially multiple objectives may result in production systems/levels of output that would not be regarded as efficient if considered solely with regard to physical output.

The 'Multi functional' European model is driving the current reforms.

FAPRI-UK analysis of the removal of trade protection indicates a significant reduction in UK production in the dairy, beef and sheep meat sectors.

Likewise, removal of the SFP would reduce UK production in the beef and sheep meat sectors.

A reduction in the overall EU agricultural budget would also reduce SFPs and exert a negative impact on production.

In my opinion any measures designed to enhance the 'Greening' of the CAP will require careful environmental specification so that they are not open to the charge that they are disguised income support measures or populist initiatives.

Do the proposals place the UK in a good position to help meet future food supply challenges?

Food supply challenges may arise due to a number of future international developments including global warming, as yet unforeseen international political scenarios and increasing global population. Securing the UK's food supply is not synonymous with maximising the amount of food that could be physically produced from UK agricultural land in the short term. I believe that it is essential that agricultural production must be environmentally sustainable so that the long-term productive capacity of the UK agricultural sector is maintained.

Micro farm level analysis indicates that depending on individual circumstances, it may not make best use of the resources at the disposal of a farmer to maximise farm production. Particularly on small farms where off-farm employment is necessary to secure an adequate farm family income, the farmer may be rational in allocating a significant proportion of his labour to off-farm employment or a diversified non-farm enterprise and adopting an extensive farm plan which generates a lower level of agricultural production than if he deployed all of his labour to the farm business.

Future food supplies must also include imports from a sufficiently wide range of countries so that difficulties arising in one exporting country do not jeopardise UK access to imports.

International commercial linkages in the food supply chain do not automatically result in the cheapest suppliers swamping local supplies as potential for animal health breakdown means local suppliers will always have to be available to meet local contractual commitments.

The emphasis placed on innovation in the proposals favours the development of biofuels.

Land use change may arise from potential conflict between attaining renewable energy targets and food supply. FAPRI-UK analysis of the liquid biofuel sector, however, indicated the existing Renewable Transport Fuel Obligation Order would be met mainly by importation of the majority of the liquid biofuel feedstock; consequently land use change is anticipated to be outside the EU.

FAPRI-UK analysis of the most radical CAP reform measures indicated that, despite the UK having already decoupled direct payments, the policy proposal which had the most negative impact on UK production was in the beef and sheep sectors where phasing out the SFP, on top of further trade liberalisation, reduced projected production by over a quarter and almost a fifth respectively. The impact of such a reduction in production would be most keenly felt in the Less Favoured Areas.

Analysis of the impact of market management tools, such as export subsidies and intervention buying, indicated that if they were removed when international prices were highly volatile, serious difficulties arose for the UK dairy sector. Northern Ireland was particularly vulnerable as a very high proportion of its milk production is converted to dairy commodities which are exported.

Will the proposals redress the imbalance in support to different sectors created by the historic basis of payments?

The FAPRI-UK modelling system is not methodologically suitable to analyse the introduction of area based payments. The research team has considered the arithmetic consequences of redistributing the SFP among existing farm types in the UK, taking account of the current allocation methods which pay significantly different amounts per Ha in England, Scotland, Wales and Northern Ireland and with only England currently transitioning to an area based system.

The introduction of area based determination of SFP will generate significant new distributional issues in addition to the sectoral distribution, whatever the outcome of negotiations. The devil will be in the detail and issues to be addressed include: area based (flat rate) payments EU-wide which may be adjusted according to purchasing power and exchange rates; tiered according to upland/lowland; and eligibility criteria regarding definition of active or perhaps non-active farmers.

The introduction of flat rate payments in the UK would lead to a large redistribution of payments in Scotland, Wales and Northern Ireland post 2013 but depending on scope for regional discretion, different rates could be introduced in each region to minimise redistribution.

There is also the issue of significant areas of agricultural land, particularly in Scotland, not currently registered for SFP which may come into play.

Where the SFP is determined on a historic basis, the main beneficiaries of former direct payments, the beef and sheep producers, have continued to receive the decoupled payments. Those livestock farmers in the uplands usually farm more extensively than lowland farmers, so while losing out if historic payments are eliminated, they may gain from the relatively larger areas farmed, depending on the tiering between LFA and lowland. The resulting impact on production is unclear as land quality is usually poorer on extensive farms, hence an increase in payments within these areas will not necessarily have an upward impact on production.

As upland areas are often environmentally and socially vulnerable, sectoral rebalancing of support could impact on environmental and social sustainability.

The dynamic hybrid model adopted in England will have phased out the historic element by the time the new CAP reforms are implemented. In the remainder of the UK, however, the move to area based payments would lead to significant redistribution of funding, irrespective of the levels of payment agreed at the EU level.

It should be noted that SFP is not the only support given to the agricultural sector. Trade protection also provides support, albeit less visible, in varying degrees to the different sectors. If income support is reintroduced as a basis for part of the SFP, this could jeopardise its SFP Green Box status with the WTO.

What aspects of the proposals should be made a common policy, and which are best left to Member States?

In my opinion, measures which impact on the functioning of the markets for agricultural commodities should remain common (renationalising them may run counter to Single Market and State Aid legislation).

As Member States have widely differing views on e.g. importance of income support measures, UK producers could find themselves at significant market disadvantage vis-a-vis EU producers in receipt of additional national support included in direct payments.

Measures for environmental protection to ensure sustainable management of natural resources are best determined at the Member State level as they are usually site-specific.

Rural development measures need to be tailored to local circumstances hence require determination at Member State level, however, they could indirectly impact on the viability of UK farming businesses, particularly in the uplands, as they may influence availability of off-farm employment which could determine whether or not smaller farm business are sustainable.

I believe CAP measures that address climate change should also remain common across the EU.

Can the proposals be implemented simply and cost-effectively, within a short time-scale?

I do not feel qualified to comment on the administration of the implementation of policy changes other than to note that significant changes to policies implemented within a short time scale can create difficulties for farmers, particularly in the grazing livestock sectors with 2 -3 year breeding cycles.

Proposals introduced too quickly may not give farmers adequate time to decide on their best course of action regarding rational adjustments whether investments or disinvestments

CAP reform measures have traditionally been phased in incrementally to provide the necessary adjustment time e.g. removal of the dairy quota.

The SFP was introduced as a 'transitional measure' to give farmers time to adjust to the phasing out of decoupled direct payments but being denominated in Euros and the strengthening of the Euro Sterling exchange rate up until this year, it has maintained its value despite modulation. Consequently, the SFP is as important a source of funding to the farming sector as when it was first introduced.

Overly complicated cross compliance and agri-environmental criteria for SFP are also likely to be very bureaucratic and hence costly to administer.

19 January 2011