Select Committee on European Union Seventh Report


32.  As part of our inquiry, we invited witnesses to set out what the long-term objectives of the Common Agricultural Policy should be. In this chapter, we review some of the responses received, and present the conclusions we have drawn from them. With this long-term vision in mind, we move on—in the next two chapters—to an examination of how the instruments through which the CAP is delivered may need to be adapted.

33.  Broadly speaking, the evidence we received drew attention to three types of goal for the CAP: economic goals, environmental goals, and social goals. Each is addressed in a separate section below.

Economic Goals

34.  The most elementary function of the CAP is its role in maintaining a Single Market in agricultural commodities within the EU, for example by setting ground rules for competition and state aid. DEFRA insisted that the CAP should secure "a free, fair and level playing field throughout the EU for farmers to produce and market their goods in a single market, as in other sectors of the economy", and added that "the integration of agriculture within EU competition policy on the same basis as for other sectors with rules set at the EU level" would be central to this (Written Evidence, Para 2).

35.  Among most of our witnesses, there was strong support for the Common Agricultural Policy's role in creating a level playing field across the EU for producers of agricultural commodities. Kirsten Holm Svendsen of the Danish Permanent Representation to the EU explained that from the point of view of the Danish government, "if you do want to have a Common Agricultural Policy it has to go on being common because re-nationalisation of support is not something that would be helpful to us at all. We all know the theories about state aid and competing via your Treasury, but it is not a situation where we would be a winner, because we are just a small country with a very small economy" (Q 456). This was a sentiment shared by producer groups in the UK, who remain broadly sceptical of moves towards re-nationalising aspects of the CAP, because they believe the UK Government would be less generous towards the domestic industry than the governments of other Member States (Q 688).

36.  UK producer groups expressed concern at what they view as an erosion of the "commonality" of the CAP, notably as a result of the application of voluntary modulation. NFU President Peter Kendall emphasized that "we have ended up with a CAP which, to me, is less 'common'. Certainly in my farming memory—for the 24 years I have been farming—we do have, even within the island of the United Kingdom, four different systems. We also have a very varied system in Europe" (Q 104). Voluntary modulation was the most commonly cited example of diminishing commonality. Andy Robertson of the NFU Scotland told us that "there are only two Member States in the whole of the 27 which are applying voluntary modulation, the UK and Portugal, which means that in practice UK farmers and Portuguese farmers are having their direct support reduced to a level which is significantly below that for farmers in the rest of the EU, and given that one of the whole points of having a single market is that people are trading on level terms, that immediately seems to us to undermine the principle of a free market" (Q 357). Further downstream in the food chain, the Food and Drink Federation also emphasised "how important it is that we have a level playing field within the EU in order for our industry to remain competitive in the UK" (Q 812).

37.  We share our witnesses' view that the "commonality" of the CAP should be its central feature. The regulation of the Single Market in agricultural commodities within the EU should therefore continue to be the primary role of a Common Agricultural Policy. However, we also note that there is a difficult balancing act to be struck between preserving the "commonality" of the CAP and responding to calls for greater flexibility in the way common goals are delivered in different Member States and indeed in different regions within each Member State.

38.  A much more controversial issue is whether the Common Agricultural Policy should aim to foster an agricultural sector that is capable of competing on world markets without subsidy and without a greater level of protection (through import tariffs) than that accorded to other economic sectors. For those who do not endorse this objective, the question becomes: to what extent, and on what grounds, should agriculture continue to be treated as exceptional?

39.  Our witnesses took a wide range of views on these issues. The main exponent of the view that the agriculture should not be treated any differently than are other sectors of the economy was the UK government. DEFRA proposed that "within 10 to 15 years, European agriculture should be internationally competitive without reliance on subsidy or protection" (Written Evidence, Para. 1). Murray Sherwin, Director-General of the New Zealand Ministry for Agriculture and Forestry, pointed out to us that "we are all members of agencies like the WTO, IMF and OECD, whose starting principles are around the benefits of trade liberalization and free trade" and yet one might wonder "how come these organisations have so many members, because they patently do not seem to believe the principles that they have signed up for" (Q 307). He went on to assure us that "there really are gains to be had for welfare" from agricultural trade liberalization, albeit alongside "some awkward distributional issues."

40.  Three main arguments were put to us for why agriculture should not be exposed to international competition in the same way that other sectors have been. The most frequent contention was that producers of agricultural commodities in the EU are forced to comply with a series of environmental, health and animal welfare standards that place them at a competitive disadvantage vis-à-vis third-country producers who are not required to meet similarly exacting standards. Subsidies then serve to level the playing field, "compensating" farmers for the regulatory burden placed on them. This is a view that received some sympathy from Mariann Fischer Boel, the European Commissioner for Agriculture (Q 690), as well as receiving strong endorsement from many of the farmers' unions.[17] Dai Davies, President of NFU Cymru, argued that "if you deny us the support then certainly hand in hand with that the constraints have to disappear as well" (Q 341).

41.  Peter Mandelson, the European Commissioner for Trade, did not accept this argument. He countered that "the obligations that we are placing on them [the European farming industry], the standards that we require of them, are designed to make them competitive" and are "going where the market is heading in any case". He explained that "we are competing in a very, very tough global economy with premium products, added value, high standards", noting that "in that sense, agriculture is no different from any other production sector in Europe" (Q 756).

42.  Underpinning these positions we detected contrasting views on the extent to which market forces should be allowed to shape the long-term structure of the industry. Commissioner Fischer Boel stressed that she did not want to see an industrialised agricultural sector in Europe, but instead wanted to promote "a diversified sector, where there is room for the small ones, for those who want to specialise in fruit and vegetables, organic or whatever, and the big competitive ones as well" (Q 690). She was consequently concerned that "if you take away all the direct payments we have no way of securing that we can maintain diversification".

43.  Commissioner Mandelson appeared to be less wary of structural change, noting that "our agricultural sector in Europe is both shrinking and becoming more efficient and competitive as it becomes more market-oriented" (Q 754). He predicted that "we will be importing more of what we cannot compete with on efficiency and cost and price terms through domestic production" but emphasized that "that does not mean to say that the agricultural sector in Europe is disappearing." Instead, it will mean producing "those things that we are best at and good at exporting", resulting in the end in "a more market-oriented, more competitive, and therefore more sustainable agricultural sector" (Q 754).

44.  Other witnesses argued that the agriculture sector would have to continue to receive special treatment if "food security" was to be achieved (Q 807). The combined effect of having less land available for food production as a result of climate change and land being used to grow energy crops, and growing demand for agricultural commodities from emerging economies like China and India, could lead to pressures on food supplies. John Don, former Chairman of the Scottish Rural Property and Business Association, suggested that due to pressures from the third world on food supplies "it is going to become increasingly important that we have a strategic supply of food and fuel in European production". The policy implication was that "we should support in a long-term way the continuation of primary production throughout Europe" (Q 212).

45.  Professor Alan Buckwell of the Country Land and Business Association also made a case for putting food security at the core of the EU's agricultural and environmental policy, but explained that "by European food security what we mean is protecting the long run food production capacity of the European Union" (Q 208). He emphasised that "we are not talking about European self-sufficiency; we are talking about the capacity to produce." Others, however, did have self-sufficiency in mind. Yves Madre of the French Permanent Representation to the European Union told us that in future, the CAP should secure "food independence" for Europe (Q 499). The French government is of the view that "food is a political tool and if you have a shortage of food you will be weak" (Q 501). It consequently insists that "we must avoid being dependent on other countries for all that we need, only for the very minimum necessary, and producing in our own European territories" (Q 504).[18]

46.  The UK Government does not share these witnesses' interpretations of what food security might entail. Sonia Phippard of DEFRA emphasised that "it is quite important that food security is not confused with either self-sufficiency or national security. The UK, and indeed the EU, have relied very heavily on effective trading relationships as part of our food security for many years." Her colleague Simon Harding explained that "there are a huge variety of threats to our food security and food supplies and only some of those threats are of a nature that would make it helpful to actually grow lots of food on your own sovereign territories." He added that "there is not really a very direct connection between how much food you grow domestically and the level of security that you attach to your suppliers of food. There are a great many other influences such as energy supplies, logistical systems, the possibility of terrorist attacks, etc." (Q 13).

47.  Mr Harding also assured us that most studies of the probable impact of radical trade liberalisation on agricultural production in Europe "seem to indicate that changes in the output of European agriculture could be less than ten per cent and could be between ten and 20 per cent and is less likely to be any more than that". He explained that "if you apply those levels of changes to what we already produce, you do not get an alarming picture of moving into a marginal food supply." DEFRA has published figures suggesting that the UK is about 60 per cent self-sufficient in food, and about 70 per cent self-sufficient in indigenous products.[19] Mr Harding pointed out that "if you were to look at our nutritional requirements and ask the question: 'Are we going to starve or feel hungry?', the answer to that would be a great deal different and the relevant figure would be a great deal higher"(Q 13).

48.  We believe that the drive towards a more market-oriented agriculture should continue. In the long term, the CAP should aim to foster a farming sector that is capable of standing on its own feet, competing in open international markets without subsidy or special protection. We acknowledge the likelihood of greater demand for agricultural commodities in future, and believe that this presents an opportunity for the European farming industry. The distorting effect of subsidies will in our view hinder the EU agriculture sector's ability to respond to, and profit from, the expected increase in global demand for agricultural products. The CAP should instead aim to steer the industry towards a position from which it can take full advantage of a future boom in commodities prices. In our view, this means moving away from the distortions that a managed and protected internal market for agricultural commodities creates and sustains.

49.  We were not persuaded by the argument that the risk of future food shortages should be hedged against by freezing current production patterns. In our judgement, food scarcity is likely to be a function of income rather than of production capacity. If the supply shortages anticipated by some witnesses do materialise, those most at risk are consumers on low incomes in the developing world.[20]

Social Goals

50.  The third reason witnesses gave for why agriculture should be treated differently than other sectors of the economy was that it generates social and environmental benefits (positive externalities) that are not rewarded by the market, resulting in what economists call "market failure". In this section and the next, we review the arguments put to us in these respects, and examine whether the CAP should aim to secure social and environmental, as well as economic goals.

51.  A number of witnesses referred to the CAP's role in supporting rural communities, particularly in remote areas. Andy Robertson, Chief Executive of NFU Scotland, pointed out that "an awful lot of what agriculture does is not just about food production but it is about its effect on the rural economy and on rural communities" (Q 339). This view received endorsement from Richard Lochhead, Scotland's Cabinet Secretary for Rural Affairs, who explained that support for Less Favoured Areas[21] delivers social benefits and wider public benefits (Appendix 4, Para. 9). Yves Madre of the French Permanent Representation to the EU concurred, noting that "agriculture is not only agricultural goods, it is a matter of the environment, landscapes, society" and that as a result "we will never succeed in applying exactly the same rules" as in other sectors (Q 536).

52.  Some witnesses were of the view that the support payments channelled to farmers through the CAP played a vital role in preventing rural depopulation. The French government believes that the CAP should "ensure that the balance between territories within the European Union will not be destroyed and in all regions we will keep enough people, enough agricultural activities," Mr Madre told us (Q 504). On a similar note, Mr Valentin Almansa de Lara of the Spanish Permanent Representation to the EU explained that Spain "wants to see people living in the countryside" and believes "agriculture must be the engine" (QQ 554, 555). "Our aim is that people in rural areas have money, have benefits, and can live there with their activities", he added. Closer to home, his sentiment was echoed by Andrew Douglas of the Scottish Rural Property and Business Association, who noted that "in Scotland we are an 85 per cent ess favoured area, and we have had the less favoured area payment for many years. We have always argued that that payment is a payment to keep people in the glens and valleys" (Q 211).

53.  Mr Almansa de Lara was sceptical of whether the market alone could deliver these outcomes: "If we leave it to the market, who will produce 2,000 litres [of milk] a year or 20,000 litres [of milk] a year in the high mountains? Nobody." Nor was he convinced of the feasibility of pursuing the desired goals without subsidising agricultural activity. He suggested that this would amount to treating farmers like "the Indians in North America who are paid to be Indians on a reserve. You need some economic activity. They need to be active in their business and their business is agriculture" (Q 557).

54.  Several witnesses stressed agriculture's role in maintaining a critical mass of population and amenities in remote areas. Andy Robertson of the NFU Scotland suggested that in his experience "if there was any reduction in the number of farmers then you started to lose critical mass and you started to lose things like schools and shops and so on. Certainly in the remoter rural communities it is fair to say that agriculture is very central" to the economic and social wellbeing of these communities (Q 328). Mr Almansa de Lara made the link between a lack of infrastructure and the demographic composition of rural areas, noting that "we are seeing more and more older farmers on the farms and no young people". Young people, he suggested, were put off by the fact that "in the very remote areas of Spain you will have no cinemas, no hospital, no disco, no girls," creating "a real problem" (Q 558).

55.  Subsidising farming through the CAP protects both agricultural and non-agricultural jobs in disadvantaged areas, we were told. Representing the Polish government, Mr Beniamin Gawlik explained that if Polish farmers with holdings of less than one hectare were denied support, "there will be no real alternative for those people" (Q 788). Walter Duebner of the German Permanent Representation made a similar argument with respect to agricultural activity in Germany's Eastern Länder, claiming that "it is better to keep the money on the farms because sometimes they have more employees than they would need if they had a sophisticated structure" (Q 410).

56.  Other witnesses drew attention to the "multiplier effect" of farming activity. Mary James of NFU Cymru cited independent evidence on Wales suggesting that "for each farming job there are ten full-time equivalents produced in rural areas" (Q 348). Andy Robertson of NFU Scotland pointed out that in Scotland, this meant that "if you did not have an active farming industry there and if you pulled away all the subsidies and goods it seeks to produce it would not just affect farmers, it would affect an awful lot of other jobs" (Q 326).

57.  From the perspective of some of our Welsh and Scottish witnesses, agriculture—and by extension, the CAP—also has a role to play in preserving traditional cultures and communities. The President of NFU Cymru, Dai Davies, drew our attention to the fact that in Wales, "the majority of people involved in agriculture still speak Welsh and it's a major issue for us in Wales if we wish to retain the language and our heritage"(Q 326). He also maintained that if subsidies were withdrawn, "we would not be able to sustain the same type of people or the same type of communities in those rural areas that we have now"(Q 329). He feared that instead, these areas might "become dormitories for people who had decided to retire and go down the route of the good life in peaceful areas or you would have commuters." Mike Rumbles, Rural Affairs Spokesperson for the Scottish Liberal Democrats, made a similar point, stressing that "especially in more remote rural areas, for example in traditional crofting communities, we don't want traditional ways of life turned around"(Appendix 5, Para. 5).

58.  We recognize that many Member States are currently relying on CAP funds—and particularly on direct payments under Pillar I—to secure social policy goals. However, we believe that many of the problems being addressed—such as the lack of employment opportunities in remote rural areas, or the fragility of rural communities—deserve to be tackled in their own right. Direct payments to farmers and landowners are an indirect, and in our view poorly-focused, instrument with which to address these challenges. Agricultural interests should not be equated with rural interests: channelling financial support through the agriculture sector may not be the most efficient and effective way of sustaining rural communities.

59.  The needs of rural communities are likely to be very different across different Member States and across different regions within each country. Agriculture may or may not have a role to play in meeting those needs, and different Member States will wish to give varying levels of prominence to the agriculture sector in their overall rural development strategy. For this reason too, we believe that uniform direct payments to farmers under Pillar I of the CAP are not the appropriate vehicle for the implementation of a diverse set of national rural policies.

60.  We believe that some of these goals—such as the diversification of the rural economy—would be better pursued through Pillar II of the CAP (and indeed provision is already made for such actions under the EAFRD), while others—such as the structural problems in the rural areas of the new Member States—would be better tackled through other EU programmes (e.g. Structural and Cohesion Funds). Social and cultural objectives, however, are in our view too numerous and too diverse to be pursued exclusively through EU-level programmes. They should be addressed primarily at a national, or even sub-national level, at domestic taxpayers' expense.

Environmental Goals

61.  There was consensus among witnesses from the environmental sector that agricultural activity can produce positive environmental side-effects, and that in the absence of market compensation for these externalities, farmers should be rewarded financially for at least some of the environmental public goods that their activity generates. This is already a feature of the CAP, for example as part of cross-compliance in Pillar I, and through agri-environment schemes in Pillar II.

62.  Dr Helen Phillips, CEO of Natural England, proposed that "EU policy should be directed towards securing environmental goods and services that are not rewarded by the prices paid for in our food"(Q 143). Natural England envisages "a new social contract between farmers and the rest of society: one where farmers see one of their primary roles as the protection and stewardship of the countryside, in return for which taxpayers are willing to make that investment in the longer term." Hannah Bartram of the Environment Agency took a similar view, advocating that public money should be spent on "the provision of public goods and services. We are obviously particularly interested in clean water, robust soils, functioning flood plains, but also the wildlife/access/landscape issues. We feel that support for these goods is justified when the market does not value them, and therefore fails to deliver them at an optimal level" (Q 184).

63.  Dr Mark Avery of the Royal Society for the Protection of Birds also highlighted a perceived market failure in this area, arguing that "agriculture is different from other industries. Agriculture produces wildlife, landscape and other public goods, providing you get the right type of agriculture, and it is fair for the public to support farmers to produce that because there is no market for farmers to tap into" (Q 57). Meanwhile David Young of Natural England warned that "a consequence of not having a CAP is that we place at risk all of those public goods that will not be delivered by the market mechanisms" (Q 145).

64.  Other witnesses pointed out that the environmental externalities of farming activity contributed to the maintenance of landscapes that the tourist industry relies upon. Dai Davies, President of NFU Cymru, emphasised that "farming does not only produce food, it has a responsibility for the environment and the environment seems very important for tourism coming into parts of Wales" (Q 326). Ian Woodhurst of the Campaign to Protect Rural England pointed out that "when you look at the Visit Britain website there is a lot of play made about the quality of the landscapes," but "there is actually no mention at all of what any of this has to do with farming or the fact that farming systems are producing and still maintaining these environmental assets and these landscapes" (Q 254).

65.  We recognize that certain types of farming activity can generate environmental benefits that are valued by society at large but whose value is not reflected in market prices for agricultural products. It does not automatically follow, however, that farmers should receive financial rewards for the environmental public goods that their activity helps to provide.

66.  Rather than being prompted with financial rewards, producers in other sectors of the economy tend to be subject to regulation that penalizes them if they fail to deliver on environmental objectives. Baroness Young of Old Scone, Chief Executive of the Environment Agency, acknowledged that "you can substitute the words 'miners' or 'the British car industry' for 'farmers' and it sounds like madness". She insisted that "the reality, however, is that the difference between the farming industry and land management generally and any other economic sector is that they are the guardians, the operators, over a fundamental slice of the environment, probably impacting on all three environmental media: land, air and water" (Q 186).

67.  "Why should consumers pay for the environment where other businesses are not paid to obey environmental laws is a very good question," conceded Allan Buckwell of the Country Land and Business Association. In his view, "it is because land managers, farmers, steward the environment the way that no other business does", but also "because consumers will not pay in their food". He thus argued that "what people say they want in environmental standards they do not match in their purchases in the supermarket. If we do not provide some assistance to the deliverers of these environmental services then we will not get these services" (QQ 241-242).

68.  Some witnesses expressed scepticism over whether the desired environmental outcomes could be secured through regulation. Professor Buckwell insisted that "in terms of achievement and results you will find that if you try to bring about the environmental standards you want by pure regulation you will not achieve it" (Q 245). Tom Oliver told us that the Campaign to Protect Rural England's "strong feeling is that it is much more effective to incentivise people than it is to regulate them into doing things" (Q 265).

69.  Others, however, pointed out that distinctions could be drawn among different environmental objectives, some of which could be met by regulation alone, and some of which could not. Dr Helen Phillips of Natural England pointed out to us that Statutory Management Requirements, one of two elements of the cross compliance conditions that farmers must meet if they are to be eligible for Single Farm Payments, are "legal requirements that are effectively being paid for through the Single Farm Payment" (Q 148). She argued that "we do not want to be either subsidising or consequently inflicting undue regulation on people for meeting basic operating requirements" but should instead consider how to protect additional requirements, such as the Good Agricultural and Environmental Condition requirements that make up the second facet of cross compliance (QQ 148-149).

70.  A compelling argument in favour of drawing such a distinction is that "at the end of the day, we do not by any manner of means want to be paying for every environmental good and service we want. If we get ourselves into that position—let us be frank—there will not be enough money to go round," Dr Phillips warned (Q 147).

71.  We believe that the CAP should continue to promote farming methods and practices that will result in environmental benefits. Given limited public resources, we see merit in drawing a distinction between environmental outcomes that can be secured through regulation—such as the control of emissions and pollution—and those that are unlikely to be delivered without financial incentives—such as the positive management of a wildlife habitat.

72.  Dr Phillips explained that in the United Kingdom, the funding formula for securing environmental goods and services from land managers is based on income foregone. She pointed out that this implies that when commodity prices go up, the inevitable reality is that "you can buy less" (Q 152).

73.  We recognise the inherent difficulty in determining which environmental goods and services should be paid for from the public purse, and in putting a price on their value to society.[22] We expect that these valuations may change over time, notably in the event of food price inflation. We consequently recommend that these decisions should be taken at a national level wherever possible, albeit on the basis of a menu of admissible uses for CAP funds defined at the EU level.[23]

74.  While most of our witnesses chose to dwell on agriculture's positive environmental externalities, the sector also has very considerable negative impacts. It is accountable for nine per cent of greenhouse gas emissions across the EU, and is the second-highest producer of methane in the UK after the energy industry (Q 164). This means that "agriculture, like all other industries, will have to be looking at its carbon emissions and looking at ways to do its job with lower emissions", Dr Avery of the RSPB told us. But he was keen to stress that this provides an opportunity as well as a challenge for the industry: "there are some quite big opportunities for land management in terms of looking at whether places like the uplands have a different future, which is in being carbon sinks, and managing upland peat and soils in different ways to stop them being degraded, to stop them drying out, to stop them emitting greenhouse gases". He concluded that "it may be that upland farmers will be paid for farming carbon rather than farming sheep in 20 years' time", and added that "flood risk management may be another thing which is produced in that way" (Q 92).

75.  Climate change considerations will clearly have to figure prominently among the future environmental objectives of the CAP. The EU's agriculture sector will need to improve its impact on the environment, but climate change also presents a business opportunity for the industry, which it must be encouraged to seize. In the long run, the best way to secure progress towards both goals may be to integrate agriculture in an EU-wide greenhouse gas emissions trading scheme. We consequently recommend that this possibility be given further consideration as a matter of urgency.

17   See also Q 209. Back

18   Some Council delegations have also stressed the "strategic role of agriculture for the security of supply of 500 million Europeans" (Press Release 15333/07 on the Agriculture and Fisheries Council Meeting held in Brussels on 26-27 November 2007, p. 9). See too the Spanish position set out in Q 551, and the Polish position set out in Q 807. Back

19   Self-sufficiency calculations are based on UK agriculture's ability to meet domestic consumer demand rather than the calorie requirements of domestic consumers. In light of over-consumption, food wastage and the possibility of switching to more calorie-efficient foods, the UK's level of self-sufficiency may be higher than these figures suggest-as the witness goes on to point out. See "Food Security and the UK: An Evidence and Analysis Paper" published by DEFRA in December 2006, pp. 33-34. Back

20   See for example the Food and Agriculture Organization (FAO) of the United Nations' "Food Outlook", November 2007 and the FAO Director-General's comments at a press conference held on 17 December 2007 at the Organization's Rome headquarters. Back

21   A term used to describe an area with permanent natural handicaps (e.g. unfavourable soil or climate conditions, mountainous terrain), in danger of depopulation or subject to environmental restrictions. Since 1975 (in the case of areas subject to environmental restrictions, since 1999), these areas have been eligible for additional financial aid under the CAP. Back

22   DEFRA has commissioned studies that attempt to place an economic value on environmental goods. See for example 'Economic Valuation of Environmental Impacts in the Severely Disadvantaged Areas', a report produced by the Economics for the Environment Consultancy (EFTEC) for DEFRA, 3 January 2006. Back

23   See also Para. 207 of this report. Back

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