Memorandum by the Australian Government
INTRODUCTION
1. Australia has a deep interest in the
evolution of the European Union (EU), especially its Common Agricultural
Policy (CAP). We welcome the reforms that have taken place in
the way production linked payments and market interventions, such
as export subsidies, are being progressively eliminated. While
these market orientated reforms will inevitably bring about positive
change, a notable and significant gap in the reforms to date has
been a failure to adequately integrate European agriculture into
the increasingly globalised market for food and agricultural products.
The forthcoming CAP "Health Check Review", the Financial
Perspectives Review and the Doha Round provide the opportunity
to enhance the competitiveness of European agriculture, reduce
long term dependency on farm income support, and to build long
term sustainability.
2. Australia readily acknowledges that the
shift away from production linked farm payments is a significant
positive step forward in European agricultural policy. A key concern
remains with the quantum of payments delivered to European farmers
that acts to distort agricultural production through risk and
wealth effects. These distortionary effects are exacerbated by
tying of farm payments to land units (thereby capitalising the
payments into land values), and where payments are constrained
to certain agricultural activities and/or there are limited alternative
agricultural land enterprises. In view of these distortionary
effects, we would therefore encourage a shift from income support
payments to policy aimed at promoting innovation, capacity building
and sustainable rural development, such as that envisaged under
Pillar Two of the CAP.
3. At the same time, CAP reform to date
has not resulted in any substantial change to market access barriers—even
though these barriers constitute a form of producer support through
the maintenance of higher than normal price levels. In Australia's
case, with the exception of wine and some comparatively minor
access for a small number of other agricultural products, this
means Australian products are effectively locked out of the European
market. As with other forms of producer support however, a policy
of restricting market access leads directly to higher producer
and consumer costs. For producers, these costs accrue though delayed
or distorted investment decisions, while for consumers, higher
food costs prevail.
4. In contrast, the Australian experience
has shown that reducing support measures (including tariff protection)
has produced a highly efficient and equitable farming sector (over
95% of farms in Australia are family owned) and an agricultural
sector able to adapt to changing markets and to resist major shocks,
such as periods of droughts and depressed prices. Australian farmers
now compete effectively in the market place without the need for
costly and inefficient support measures.
5. The policy experiences of the Australian
agricultural sector are therefore directly relevant to the European
sector. In particular, Australian experience has shown that, by
providing an environment wherein competition is encouraged (through
more open markets and reduced support measures), farmers will
adjust their farm businesses to suit the market by adopting new
farming practices, changing product mixes and generally seeking
new ways to meet changing consumer demands. Australian government
policy has sought to facilitate the shift to this market orientated
environment through programmes that promote business adjustment,
capacity building, innovation, while, at the same time, eliminating
market management measures and tariff barriers to imported product.
The Australian dairy industry provides a tangible example of this
approach having seen the industry move from a highly supported
and regulatory constrained sector to a sector now fully deregulated
and exposed to the international trading environment. This has
seen, despite the presence of persistent drought, the growth in
the Australian dairy industry to the point where it is now a major
influence on world dairy markets.
LEVELS OF
AGRICULTURAL SUPPORT
6. Levels of EU agricultural support have
changed little since the late 1980s (figure 1). The EU has been
making positive changes in its agricultural support policies through
changing away from price support toward less market distorting
decoupled payments, and limiting budgetary expenditure on agriculture.
It has been willing to change forms of support for its agriculture
but it has done little to reduce levels of support. Figure 1 also
shows that EU support levels are higher than the OECD average.
Figure 1
PRODUCER SUPPORT ESTIMATE (PSE) AS A PROPORTION
OF TOTAL GROSS FARM RECEIPTS (1986-2005)
Source: OECD 2006.
STRENGTHS AND
WEAKNESSES OF
DECOUPLED PAYMENTS
7. The EU has retained substantial levels
of support and protection through tariffs and tariff quotas while
member states have also retained some coupled payments. It has
framed the rationale for changing toward decoupled payments in
terms of decoupled support being minimally market distorting,
as is stated in the Uruguay Round Agreement on Agriculture. If
the payments are truly decoupled in an economic sense, they should
have the same impacts on production, consumption and trade as
would the complete removal of the payments.
8. The extent to which the changes actually
reduce market distortions depends critically on whether the decoupled
payments are in fact minimally market distorting, not just considered
to be; the level of support provided and the effects of other
forms of support. To be minimally distorting to production, consumption,
trade and prices, changing from current coupled payments or price
support to decoupled support should be almost identical in its
effects to complete removal of the coupled payments. Changing
from highly distorting price support toward decoupled payments
reduces market distortions because prices faced by consumers are
closer to world prices. Because of this the EU change toward decoupled
payments along with lower price support means less market distortion
than maintaining the same levels of price support.
9. There are many reasons however why changing
to decoupled payments reduces production distortions by far less
than eliminating the support. These include:
— income and wealth effects from
the payments affect credit availability and adoption of technology,
thereby affecting production;
— the payments are being made
in conjunction with forms of clearly distorting support, including
tariffs and tariff quotas that affect prices and mean that even
if the payments themselves were properly decoupled, the support
system would still distort market prices, production, consumption
and trade;
— expectations by producers that
payment bases and/or rates can be changed by current planting
or production decisions and political pressure can affect current
production decisions. The EU Single Payment Scheme (SPS) may reduce
but not eliminate this factor;
— importantly, ongoing payments
enable producers to continue to produce products that have been
revealed as their preferred products without the costs or risks
of making substantial changes that would be required in the absence
of support. As such they lock in existing production patterns
and levels—levels that have been highly distorted by decades
of production stimulating support arrangements;
— the payments support agricultural
land prices. The higher prices help maintain land in agriculture
rather than have it transfer to non-agricultural uses. They also
make it more difficult for new farmers to enter the agricultural
sector; and
— whole farm payments such as
the SPS are a subsidy to farming and farmers. As such they are
likely to maintain resources in farming that would flow to non-farm
activities if that subsidy were removed.
10. Because of these factors, the economic
benefits from changing from coupled to decoupled payments are
likely to be overstated, with the change to decoupled payments
being only a partial substitute for reducing levels of support.
11. Overall, the EU is making progress toward
an agriculture that is less costly to its economy and less distorting
to world markets than the very distorting, open-ended price support
policies that formerly applied. However support levels remain
high and many remain considerably market distorting. The move
to decoupling is helping reduce distortions but can only go part
of the way. There are several areas where distortions could be
reduced further, especially through reducing tariffs and other
barriers to market access.
REORIENTATION OF
SUPPORT MORE
TOWARD RURAL
DEVELOPMENT
12. Until recently about 90% of EU budget
outlays for agriculture have been from Pillar One of the CAP.
The remaining 10% has been under Pillar Two that covers rural
development expenditure.
13. The extent to which such investment
is well spent in rural development depends on the returns obtained,
both in terms of profitability of activities and social outcomes
relative to such returns from alternatives. If modulation results
in reduced direct support for agricultural production and helps
remove obstacles to rural adjustment it should help reduce market
distortions arising from support. However, market distortions
may be perpetuated if projects for rural development amount to
little more than state financing of activities for private profit.
Examples could be government financing of pollution abatement
by farmers where to obtain efficient outcomes the costs should
be internalised under the "producer pays" principle,
or state provision or subsidisation of improved planting material
which would be effectively a production subsidy.
14. Australia supports the European Commission's
(EC) move to create a single instrument to finance the rural development
policy: the European Agricultural Fund for Rural Development (EAFRD).
Australia encourages the EC to shift Pillar One spending to the
EAFRD (Pillar Two). The objectives of the EAFRD align closely
with the objectives of the Agriculture Advancing Australia (AAA)
package. The AAA package is an integrated package of Australian
Government programmes that help primary producers in agriculture,
fishing and forestry be more competitive, sustainable and profitable.
15. A project administered under the AAA
package may provide:
— funding for business and natural
resource management training and education;
— support for industries undergoing
change;
— financial management tools;
— financial information and referral;
— funding for professional advice,
skills development and training;
— assistance for farm families
in serious financial difficulty; or
— improved access to markets.
16. Projects under the AAA programme allow
industries to identify challenges and opportunities, and address
them by developing and implementing industry-led strategies. Australia
has seen the positive results these programmes deliver to rural
communities, while not distorting trade. It is for these reasons
Australia supports EC instruments such as the EARFD and encourages
the EC to shift funding from direct support towards rural development
programmes.
AUSTRALIAN REFORM
EXPERIENCE
17. Australia's agricultural sector was
never highly protected, but it was more structured and burdened
by statutory regulation throughout the 1970s and early 1980s.
This resulted in many industries experiencing poor export performance
and high costs of production, effectively burdening producers
and consumers alike.
18. There have been significant structural
and macroeconomic reforms in Australia since the 1980s, for example,
the floating of the exchange rate in the early 1980s. These reforms
have been aimed at reducing, or removing, distortions to competition
in order to improve the functioning and flexibility of markets.
The resulting rise in Australia's productivity and improved competitiveness
in world markets has enabled real GDP to grow at an average annual
rate of about 3.5% during the past 15 years, which has raised
per capita income to 8th place among OECD countries. Reform has
also made the economy more flexible and resilient to external
shocks, like the Asian Financial Crisis in the late 1990s and,
more recently, the drought.
19. Australian farmers now compete and win
in the market place. There may well be lessons for European countries
in the processes Australia has been through over the last two
decades to reduce regulation successfully and remain competitive
in the world market.
20. The Australian dairy industry provides
an example of agriculture's response to structural change following
the removal of price-distorting support. The removal of regulated
support policies and the introduction of competition have led
to positive industry adjustment and expansion. The Australian
experience has shown that farmers, given clear market signals,
can adjust well to the removal of market support mechanisms. Despite
preliminary concerns among some advisors that deregulation would
result in widespread and permanent reductions in income and in
industry contraction, this was by no means an observed impact.
21. The Australian dairy industry went through
a 15-year deregulation process, beginning in 1986. Policy reforms
by the Australian Government during the late 1980s and the 1990s
largely deregulated the manufacturing segment of the industry.
These reforms led to a build-up of pressures within the dairy
industry during the late 1990s for the complete removal of all
remaining manufacturing and fluid milk price supports at federal
and state levels. The industry, recognising the pressures for
this final step in deregulation, took a reform proposal to the
Australian Government. It then worked cooperatively with the Government
to develop a restructure package that gave dairy farmers the opportunity
to adjust over time to a completely deregulated market place.
22. This reform package, which did not substantively
increase the overall level of assistance to Australian agriculture,
saw all existing price supports for dairy products removed on
1 July 2000. The package provided an eight-year stream of direct
payments to farmers, based on historical production but unrelated
to current or future production levels.
23. Since the reform, farmers in Australia
have used the adjustment assistance to restructure their operations
and improve their productivity to offset the loss of price support.
Some farmers used the payments to effectively invest off-farm
and, in some cases, to withdraw from agriculture altogether.
24. The impacts of deregulation have varied
between dairy enterprises and regions. Many farmers reacted to
the change in the market environment by increasing their farm
output. They expanded herds and changed the way they used secondary
inputs such as feed. More efficient use of pastures, fertilisers
and irrigation increased farm-carrying capacity, enabling farmers
to utilise land more intensively in the production mix. Overall,
since deregulation, dairy production in Australia has moved towards
more efficient dairying options, with more effective pasture and
supplementary feeding management contributing to improved productivity
across the entire dairy sector.
25. Dairy farm numbers have almost halved
in the last 20 years—a period that included deregulation.
Milk production however, has doubled and the value of exports
has increased from $A331 million in 1983 to $A2.42 billion in
2005.
Conclusions
26. New European agricultural policy moving
towards increased use of Pillar Two mechanisms (such as EAFRD)
will lead to European farmers being increasingly competitive in
international markets. The positive experiences of other nations
reflect possibilities for EU farmers, as shown by the success
of the Australian export-focused dairy industry and Australia's
AAA programme. The EU is well placed to show leadership by removing
trade distortionary expenditure to the benefit of its farm sector
and the global market.
27. Overall, Australia welcomes EU progress
toward an agriculture that is less costly to its economy and less
distorting to world markets. Support levels remain high however
and many remain considerably market distorting. The move to decoupling
is helping reduce distortions but can only go part of the way.
There are several areas where distortions could be reduced further,
especially through reducing tariffs and other barriers to market
access.
28. True reform cannot be undertaken with
continuing high tariffs and interventionist policy. In order to
be globally competitive, the regulatory burden must be reduced
and policies must encourage self-reliance. The factors contributing
to the success of Australian agriculture, through self-determination,
capacity building and adjustment assistance are equally applicable
to the European situation.
FURTHER REFERENCES
The following reference materials are included
for further information:
Harris, David. Australian dairy market deregulation:
Coping with policy change. 2006.
Rural Industries Research and Development Corporation.
Coping with change—farm level adjustment and policy reform.
2006.
Australian Government information brochures:
— Farm Success without production
subsidies;
— Helping farmers through exceptional
circumstances;
— Dairy reform: Creating a
profitable, export-oriented dairy industry; and
— Managing Risk: Australia's
farm management deposits scheme.
15 June 2007
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