House of Lords - European Union

Select Committee on European Union Written Evidence

Memorandum by EuroChoices

OBJECTIVES OF THE CAP

1. The objectives of the CAP as stated in Article 33 of the Consolidated Treaty need to be overhauled and modernised. They reflect the priorities of a different era and are no longer appropriate targets of public policy, if they ever were. The competitiveness of EU agriculture has not been well served by this policy framework. Higher productivity, fair standards of living, reasonable and stable prices can be delivered in a more effective, efficient and sustainable way by allowing EU agri-food and rural resource markets to operate more freely and trade more openly on world markets, with less intervention by the state.

2. The CAP of the future will need to have a much greater focus on issues that are more legitimate targets of public policy in the 21st Century. It will also need to reflect more explicitly the rural dimension that is now de facto a major element of CAP expenditure. Fundamentally, policy will need to be orientated more towards correcting the market failures and missing markets associated with land utilisation and food and fibre production. This would encompass not just environmental issues but would extend to landscape management, biosecurity, food safety, animal welfare, bioenergy and climate change issues.

3. Such a radical revision of policy objectives seems called for when one considers the likely nature of future policy priorities. It also points to the need for a change of name for the policy programme to reflect these changed priorities. Various suggestions have been made ranging from quite modest changes to include "Rural" in the name, to more radical options that seek to encompass notions of "Land Use, Food, Energy and Environmental Security". There are important questions, moreover, about whether the policy can or ought any longer to be described as "common", given the highly diverse nature of the agri-food and rural sector in the EU-27.

THE REFORMED CAP AND THE SINGLE FARM PAYMENT

4. At the centre of CAP Reform in June 2003 was the decoupling from production of various direct payments (DPs) to farmers and the introduction of a consolidated Single Farm Payment (SFP) attached to land and based on DPs claimed in 2000-02. From an economic standpoint this was and remains an attractive concept as it is likely to increase the influence of the market on production and trade. It signalled the break with the previous coupled system of support which had the ludicrous effect of providing incentives to farmers to operate enterprises at commercially unprofitable levels of output simply to collect the production linked subsidies. The political sustainability of this system of direct aid linked to historical levels of production, however, is very much open to question.

5. Formal economic analysis of the impact of this reform on UK agriculture has been carried out. In the UK beef sector, for example, the projected effects relative to the baseline pre-reform situation are shown in Figures 1 and 2. The introduction of the SFP results in a 17% drop in UK beef production by the end of the projection period. There is, however, a marked increase of 9% in projected beef prices: this is driven by an EU-wide reduction in beef production and subsequent increase in EU beef prices. The evidence suggests that the impact of the policy on overall market receipts (excluding DPs) is likely to be broadly neutral. It is worth noting, however, that the beef and sheep production sector in much of the UK is in a rather parlous state: underlying profitability is very poor and this is likely to accelerate the trend to part-time farming in this sector.

Figure 1

UK SUCKLER COWS

Figure 2

UK CATTLE REFERENCE PRICE

Source: FAPRI-UK.

6. Experiences with the implementation of the 2003 CAP Reform illustrate the lack of a "common" approach to policy implementation in the EU-27 and the way in which this can hinder desired policy outcomes. There are now significantly different levels of decoupling or recoupling of payments throughout the EU. The basis on which these payments are made differ quite markedly: some are paid according to an historic entitlement formula, others have an area basis, and there are static or dynamic hybrids of these two approaches. This uneven pattern has important implications for the prices of agricultural commodities. The fact, for example, that certain member states have opted for recoupled payments means that overall EU production of certain commodities is greater than if they had implemented full decoupling. This tends to keep the EU price of the relevant commodities lower than if payments had been uniformly decoupled, thus penalizing members who have implemented decoupling in full.

MARKET MECHANISMS

7. As part of the CAP Reform process and WTO commitments the EU is reducing the intensity of traditional market management instruments, particularly intervention purchases and the use of export subsidies. This should remove the need for production limitation measures such as set aside and milk production quotas. Evidence suggests that elimination of export subsidies would impact significantly on the UK dairy and beef sectors. The negative price effect in the dairy sector is likely to be felt most severely in the butter market, implying that intervention prices for butter would need to be reduced to avoid the costly build up of intervention stocks following the elimination of export subsidies. As a result there would be downward pressure on producer milk prices and production. UK beef prices and production would also be negatively affected relative to a baseline scenario where export subsidies remain in use. The impact on the sheep sector would be minimal as it is not heavily dependent on this form of protection.

8. The EU Commissioner has signalled her intention to abolish EU milk quotas when the current legislative basis runs out in 2014. Evidence suggests that abolition of quotas coupled with export subsidy elimination would have either a relatively neutral or only mildly positive impact on production at the EU-25 level; there would be some downward pressure on EU producer milk prices. Within the UK dairy sector, however, the impacts would be more significant whether under Uruguay or Doha Round trade rules. The UK producer price of milk is projected ultimately to be 9% to 11% lower compared to a baseline without these policy changes (Figure 3). This leads to a fall in UK milk production of between 14% and 16% (Figure 4). Market receipts for the dairy sector decrease by between 26% and 29%, the substantial decline reflecting the combined impact of production and price falls. Dairy cow numbers are projected to fall by about 15% with knock on effects on supply to the beef sector.

Figure 3

PRODUCER MILK PRICE (ENGLAND)

Figure 4

UK MILK PRODUCTION

Source: FAPRI-UK.

ENVIRONMENTAL PROTECTION AND CLIMATE CHANGE

9. The projected reduction in EU cattle and sheep numbers as a result of the 2003 CAP Reform and WTO commitments will result in significant reductions in methane emissions from both enteric fermentation and manure management. In areas of the EU where livestock production predominates it is estimated, in Carbon Dioxide equivalent terms, that the reductions from agriculture would be 15-20% by 2015 compared to the pre-CAP Reform period. The extent of the reductions, however, can be influenced by the management systems followed. Further thought, therefore, may need to be given to the potential of the CAP to capture the full benefits of projected reductions in livestock numbers.

10. Another means of reducing Carbon Dioxide levels in the atmosphere is carbon sequestration into agricultural soils ie the creation of carbon sinks. Agricultural producers can increase the carbon content of the soil by changing production practices, such as the adoption of minimum tillage. This practice, potentially, could complement wider efforts to reduce emissions from the burning of fossil fuels. The science surrounding sequestration is disputed but the United Nations Framework Convention on Climate Change (UNFCCC) is slowly developing the rules and modalities governing all aspects, including inventories, measurement of additional stocks and the unintentional release of stocks.

11. A central plank in the EU's strategy to reduce Greenhouse Gas Emissions (GHG) is the Emissions Trading Scheme (ETS), which began operation in 2005. The ETS, however, does not trade credits generated by sequestration, reflecting a general EU reluctance to adopt this practice and ongoing opposition from environmental groups to reliance on carbon sinks that might dilute the commitment to emissions reductions. This will limit the potential for agricultural producers to earn income from this activity, in contrast to the position in the USA where its use is being encouraged in a modest way. The CAP Second Pillar, however, could be a possible avenue to compensate producers for sequestration activities. A recent evaluation by the Commission has estimated that agricultural soils could sequester up to 20% of the total EU commitment to reduce emissions.

12. Bioenergy has the potential to contribute to a new energy paradigm, not as a replacement for oil but as one element in a portfolio of renewable sources of energy that can diversify energy supplies and reduce strategic dependence on imported fossil fuels. Biofuels such as ethanol and bio-diesel could offer an important low-carbon alternative to petroleum, depending on the production technologies adopted. Ethanol produced in industrialized countries from corn, for example, may reduce life-cycle GHG only 10-30% compared to oil, whereas ethanol produced from sugar cane or cellulose may reduce it by 90% or more. In both cases, the greenhouse gas reductions increase significantly if agricultural practices are adopted that enhance soil carbon sequestration and are less intensive in their use of petroleum-based fertilizers and fuels. This is especially significant in the case of bioenergy-dedicated crops like grasses and trees, as their production is characterized by relatively low use of fertilizer and other petroleum-based products. If, however, areas which are currently acting as a carbon sinks are disrupted the release of GHG could well cause an overall negative impact.

13. The EU has a biofuel target of about 6% of EU fuel supply by the end of 2010. The potential market for biodiesel is currently larger than for ethanol as 60% of fuel is diesel. Production capacities for biodiesel in the EU tripled over the last three years and there have been increasing investments in ethanol production. If the EU follows an appropriately regulated, market-based approach then there will probably be significant opportunities to develop sustainably the production of biodiesel and bioethanol feedstocks, resulting in a very significant increase in land use for bioenergy production. In the USA the bioenergy sector is developing apace and in the process is transforming agricultural markets. Ethanol production and consumption has grown by about 23% per year since 1998 and now represents 20% of maize demand. Rising prices for maize have all but eliminated the need for government supports. If the EU sector moves ahead in similar fashion we can expect significant effects on cereal and oilseed markets.

RURAL DEVELOPMENT

14. In principle it seems justified to shift the policy emphasis and funding from Pillar I to Pillar II measures, with greater emphasis on the correction of market failures and missing markets, for example in the area of agri-environment interactions. This has been signalled as a goal by the Commissioner but is likely to be politically unattractive at an EU level. Any move in this direction raises both conceptual and practical problems. Conceptually, for example, work needs to be done to clarify and perhaps reach a consensus on where the balance of public interest lies in a number of areas. We need, for example, more comprehensive and robust evidence of public preferences and values for socio-cultural landscapes that reflect different types and intensities of farming, in both lowlands and LFAs. Practically, will member states be able positively to pay farmers for production of valued public goods rather than just compensate for income forgone? Will there be adequate flexibility to reflect regional preferences? Pillar II is currently co-financed at 50% thus creating a built-in disincentive to make the switch to Pillar II, so will we need changes in the co-financing rules? We know that the administrative costs of agri-environment-type programmes can be high, so can all of this be accomplished with the minimum of bureaucracy and cost?

15. Rural development policy in the future might place a more strategic emphasis on the situation in farm households rather than focusing narrowly on the farm holding. Indeed this would be consistent with the ethos of the so-called European Model of agriculture. This is essentially a multifunctional model reliant on family labour but where farmers and their spouses are increasingly finding ways to combine on-farm and off-farm employment. Farm households, therefore, are now more directly affected by a range of other policies, pointing to the need for greater integration and complementary between rural development and mainstream policies. From a farm household perspective policy should facilitate the development of a more diversified rural economy, human capital formation and enhanced quality of life. Future rural policy, therefore, could focus more on the adjustment process of labour moving out of primary agriculture and look at measures which support diversification and entrepreneurial activities such as market access, value-adding (organic/local produce), knowledge transfer, education, retraining and social networking. The role of rural policy in contributing to social and civic goals and the structures through which these are addressed perhaps needs to be reconsidered.

WORLD TRADE

16. The EU's WTO obligations, if implemented, will have differential effects on EU agriculture. Dairy sector simulations of the impact of reducing EU tariffs agreed under the URAA by 60% (currently the EU offer in Doha) indicate only minor price and production impacts beyond what can be expected from the elimination of export subsidies (paragraph 7). The reason is that internal price reductions due to export subsidy elimination enhance the effectiveness of import tariffs in protecting the EU market. Thus, even when import tariffs are reduced by 60% they still stem the flow of imports from third countries into the EU.

17. In the beef sector the impact of a 60% tariff reduction is more significant; this seems to be about the level where beef tariff reductions begin to bite. Prices ultimately fall a further 4% beyond what would be anticipated from eliminating export subsidies. In the arable sector tariff reductions, in addition to eliminating export subsidies, had little impact on prices and production as they were still effective in stemming crop imports.

18. The details of an eventual WTO trade agreement are crucial. The chairman of the WTO negotiating group on agriculture, Crawford Falconer, has stated that the EU will likely have to make tariff cuts of more than 60% in order to obtain an agreement. This would undoubtedly result in substantial third country imports and downward pressure on EU market prices for certain commodities. Lower food prices, of course, will benefit consumers, especially the lower income groups that spend a relatively high proportion of their budget on food. This should lead to a net gain in economic welfare in the EU as a whole.

8 June 2007