Memorandum by Kenneth J Thomson and Sophia
M Davidova, respectively Professor Emeritus, University of Aberdeen
and Reader, Kent Business School, University of Kent at Wye College
1. What should be the long-term objectives
of the CAP? Does the title "Common Agricultural Policy"
aptly fit your perceived objectives of the policy? What do you
consider to be the main pressures on the CAP as it currently is?
1.1 There is a continued need for the EU
to have a Common Agricultural Policy—though with new objectives
(see 1.2 below), given:
(a) the long-established tendency for all
governments to intervene in agriculture;
(b) the need to maintain the Single Market
without unnecessary barriers to internal (or external) trade;
(c) the extensive positive and negative externalities
of agriculture; and
(d) the difficulty of extending mainstream
policies for industry and business (eg taxation, pollution control)
to the often small-scale and family-oriented aspects of farming.
1.2 The objectives of such a CAP should
be to ensure that:
(i) the provisions of EU competition policy
apply fully to agriculture, particularly in terms of the control
of state aids and the maintenance of the Single Market;
(ii) there is an adequate supply of safe
food to citizens of the EU;
(iii) environmentally friendly farming practices
provide an adequate supply of public goods, ie agricultural "multifunctionality";
(iv) farming is subject to the polluter pays
principle;
(v) farming suffering from structural disadvantages
is offered assistance towards commercial and environmental sustainability;
and
(vi) farming exposed to unfavourable weather
conditions, pest and diseases is offered assistance serving as
a safety net (only).
1.3 Such a policy would still be suitably
entitled the "Common Agricultural Policy" rather than
eg the "Common Rural Policy", but it would lose most
of the current CAP objectives, some of which date back to the
1950s and are defined with a productivist mind-set. Instead, it
focuses on the provision of public goods (and avoidance of "public
bads").
2. What has been your experience so far with
the reformed CAP? What has worked well and less well? And where
can lessons be learned?
2.1 The reformed CAP has involved (a) conversion
of most but not all commodity-linked direct payments to "decoupled"
Single Farm Payments (SFPs) based on historical and/or area "entitlements"
in the 15 "old" Member States and in Slovenia and Malta,
and (b) the introduction of Single Area Payments (SAPs) based
on registered farm areas in the 10 other New Member States (NMSs).
2.2 In the UK, the flexibility allowed to
different regions has been exploited via the four different SFP
systems applied in England, Wales, Scotland and Northern Ireland.
This has allowed a welcome but limited degree of subsidiarity
in agricultural policy decision-making. In England, the well-known
problems of the Rural Payments Agency in calculating and making
SFPs have damaged expected farm income flows.
2.3 In the NMSs, the changes in payment
systems were more profound. Pre-accession national support programmes
provided farmers with advance payments, mainly used for working
capital. Many NMS farmers have apparently treated the new Single
Area Payments (SAPs) in the same way, planning to use them to
cover their operating expenses. The new time schedule of payment
disbursement (called ex post by some commentators, Bozik
and Blaas, 2005) has created cash-flow problems. These early experiences
suggest that, irrespective of the policy-makers' intentions, as
long as such payments exist, farmers will include them in their
farm management decisions and that simply enable farmers to continue
farming as in the past possibly with less intensive systems, since
SAPs do not depend on yields.
3. Do you consider the Single Payment Scheme
to be a good basis for the future of EU agricultural policy? What
changes might be made at the EU level to the Single Payment Scheme,
including to the rules governing entitlements, in the short and/or
the longer-term?
3.1 The Single Payment Schemes should be
used as a basis for the future of EU agricultural policy only
if they are subject to further and deeper cuts due to compulsory
modulation or capping at the EU level, since:
(i) they have no clear and defensible foundation
except the continuation (sometimes in modified form) of past support
to agriculture;
(ii) they have established, and are consolidating,
a powerful interest group in favour of their continuation, regardless
of their merits or deficiencies; and
(iii) the cross-compliance conditions are
weak, and their monitoring and observance are uncertain particularly
in view of the different administrative capacities across the
EU.
3.2 In their present form and level, the
SFPs do not stimulate structural change. A study (EU- FP6 project
"Impact of Decoupling and Modulation in the Enlarged Union",
IDEMA) of farmers' intentions indicates that: (a) the introduction
of decoupled payments in England is affecting farmers' management
plans only marginally; few farmers plan to modify their exit or
growth decisions; and (b) some more farmers intend to adjust the
output mix and to expand (slightly) their diversification into
off-farm activities.
3.3 In the NMSs, SAPs mean higher and more
predictable payments. As a result, farmers plan to stay longer
in agriculture, would like to increase their land area and do
not intend to diversify to non-agricultural acytivities. The majority
of farmers are pessimistic about their ability to make sufficient
profits without policy support. This reliance on support and the
focus on farming activities may strengthen further the anti-liberalisation
lobby in the EU.
3.4 In view of the above, in the short term,
efforts should continue to extend the compulsory modulation of
SFPs from Pillar I income support into Pillar II "rural development"
support. In the longer term, the level of SFPs should be reduced
and a time limit should be imposed on their continuation, and/or
they should be converted to a "bond" in line with proposals
made by LUFPIG, Swinbank and Tangermann, and others.
4. What short and longer-term changes are
required to the CAP's market mechanisms? Suggestions made by the
Commission have included re-examination of certain quotas, intervention,
set-aside, export refunds and private storage payments
4.1 No comments, due to length constraints.
5. What is your view on the introduction of
the European Agricultural Fund for Rural Development (EAFRD)?
Do you consider that it is meeting its objectives thus far? Is
it suitably "strategic" in nature, meeting the needs
of rural society as a whole rather than being restricted to aiding
the agricultural industry? How well is it being co-ordinated with
other EU and national policies on regional and rural development?
5.1 The EAFRD is largely restricted to aiding
the agricultural industry and population, and does little for
the rest of rural society. Its establishment marked a de-coordination
of agricultural and regional/rural development, in that DG Agriculture
and Rural Development has become responsible, via the EAFRD, for
most smaller-scale regional/rural development. Also, due to the
"80% rule", there is also little coordination of Pillar
II spending with the objectives of the EU's Cohesion policy, under
which attempts should be made to bring poorer regions more up
to the standards of the EU as a whole.
6. Is there a case for a higher level of EU
financing of rural development? Do you have a view on the extension
of compulsory modulation from Pillar 1 (Direct Payments) to Pillar
2 (Rural Development)?
6.1 Non-agricultural (or even agricultural)
rural development, ie investment, restructuring, modernisation,
which can be promoted banks and other private agents, seems in
little need of substantial assistance in the more advanced EU
Member States, especially assistance over and above that offered
by mainstream state support for public infrastructure, business
development advice etc. However, there is a need to fund agricultural
and non-agricultural rural development in the NMSs.
6.2 Irrespective of the need for EU financing
of rural development, looking more broadly at the future of CAP,
compulsory modulation is a practical and politically feasible
way to put pressure for the decrease of SFP (SAP). The current
rate of modulation does not exert any pressure to decrease farmers'
reliance of support. Iraizoz et al (2004) studied 369 commercial
farms in Navarra, Spain, and found that after the application
of the franchise, only 201 farms would be subject to modulation,
with a mean reduction in payments of only about €600 per
annum. The franchise of course excludes the many smaller farms
from modulation completely.
6.3 Another option is to leave SFPs "exposed"
with no clear justification and to hope that budget pressures
and/or reasoned argument will force down the rates in a straightforward
way. Unfortunately, current high world prices make financial discipline
rather irrelevant—though of course it should be easier to
undertake CAP reform during an "easy" period (such as
the present time) than in the midst of a crisis.
7. What benefits can the EU's World Trade
Organisation obligations create for EU agriculture and, consequently,
for the EU economy as a whole?
7.1 Given the flexibility (eg on "tariffication",
the "green box") and weaknesses (eg the Peace Clause)
of the current WTO obligations on EU export subsidies, market
access and domestic support for agriculture, and the present climate
of high world market prices for agricultural products, these obligations
have only patchy effects, eg for sugar and banana regime reform,
via the Dispute Settlement Mechanism.
7.2 With its border protection substantially
unaltered, EU agriculture is still supported by the CAP, albeit
in a substantially different way, with single payments. Implementation
of current or future WTO proposals would further push EU agriculture
towards a more dynamic competitive situation where it must focus
more on local (including EU) and differentiated products.
8. To what extent has the system of cross-compliance
contributed to an improved level of environmental protection?
How is it linking with other EU policy requirements such as the
Water Framework Directive?
8.1 No comments, due to length constraints.
9. How can the CAP contribute to mitigation
of, and adaptation to, climate change? What do you consider the
role of biofuels to be in this regard?
9.1 We consider that the CAP has only a
small role to play in mitigating and adapting to climate change,
especially if other environmental concerns such as those for landscape
and biodiversity inhibit the large-scale adoption of biomass cropping
in Europe. The economic and technical efficiency of agriculture
in replacing fossil fuels is as yet unproven: at a recent conference
of the UK Agricultural Economics Society, it was concluded that
"biofuel production in the EU might only be profitable
in the EU with oil prices over $90 per barrel, and a 10% share
of biofuel in overall fuel consumed in the EU-15 [ie the Commission's
proposals of January 2007] would require an area equivalent
to 50% of the current arable land area" (AES Newsletter,
May 2007). A recent Commission estimate (Summa, 2007) is that
a 14% bio-fuel share by 2020 would require about 18 million ha
of land in the EU-25, out of a total of just over 100 million
ha. Most of this land would be used for growing cereals for biofuel
(about double the present area of 4 million ha) or woody material
(7 million ha). There would be a significant but not huge effect
on cereal and vegetable oil prices, but meal prices would decline.
9.2 Recently there are some—probably
overoptimistic—expectations about the potential for biocrops
in the NMSs ("Biofuels in Central and Eastern Europe",
conference organised by Agra Informa, Prague 17-18 April). One
factors is that oilseed yields in the NMSs are still low, at 50
to 60% of the EU-15 average (AgraFood East Europe, May 2007).
The potential for oilseeds in the last two entrants, Romania and
Bulgaria, is assessed to be high.
9.3 Unless it is considered that biofuels
are likely to have a major role in reducing the EU's dependence
on external sources of energy, so far there is no clear argument
as to why agriculture needs special assistance from the taxpayer
in coping with the gradual shifts in temperature/rainfall involved
with climate change.
10. The Commissioner has expressed her dissatisfaction
at the financing agreement reached by the Member States at the
December 2005 Council. Do you consider the current budget to be
sufficient? Do you consider co-financing to be a possible way
forward in financing the Common Agricultural Policy?
10.1 The current budget for Pillar I of
the CAP was determined (before modulation) by the October 2002
European Council, and is certainly more than "sufficient",
especially as the purpose of and "need" for single payments
are undefined.
10.2 The budget for Pillar II was reduced
by about 20% during the 2005-06 negotiations. We see no great
justification for seeking an increase even in this part of the
overall EAFRD budget, and would prefer to see development assistance
channelled through the Regional and Social Funds, primarily to
New Member States.
10.3 Co-financing has been an integral part
of EU budgeting for development assistance. The "opt-out"
("Sums transferred to support rural development measures
pursuant to such arrangements [for voluntary modulation up
to 20%] shall not be subject to the national co-financing and
minimum spending per axes rules set out in the Rural Development
Regulation" (European Council, December 2005) came as
something of a surprise, and does not appear to be taken up in
the recent UK proposals for Rural Development Plans.
11. What has been the impact on the CAP of
the 2004 and 2007 enlargements and what is the likely impact of
future enlargements of the EU on the post-2013 CAP?
11.1 The 2004 and 2007 enlargements have
not yet had a major impact on the CAP, largely because the current
framework of the policy was determined by the October 2002 CAP
budget agreement and the 2003 Luxembourg agreement on CAP reform.
The first ten New Member States did not play a large part in the
2006 negotiations over the budget for 2007-13, except to insist
on retaining the commitments made to them in the accession agreements,
eg transition from 25% to 100% of the EU-15 single payment rates.
The entry of Romania and Bulgaria in 2007 was expected by some
(but not all—see Davidova and Thomson 2005 to lead to a
reduction in these rates in order not to violate the budget ceiling
for the CAP, but with high world prices (and hence lower export
subsidy payments) this now seems unlikely.
11.2 However, the enlargements (2004 and
2007) changed the political economy of the decision-making, strengthening
the group opposing policy liberalisation. The previously mentioned
IDEMA study indicated that the strongest opposition to policy
liberalisation comes from farmers in the NMSs. Newcomers to farming
in NMSs tend to reject policy liberalisation and endorse notions
that farmers should concentrate on agriculture. These views are
likely to have important implications for the decision-making
processes surrounding agricultural policy reform in the EU. The
new entrants to the Union do strengthen the political opposition
to further agricultural policy reform, and most probably to co-financing.
The difficulties to liberalise the policy are likely to increase
with future enlargements.
12. How could the CAP be further simplified
and in what other ways would you like to see the Common Agricultural
Policy changed in the short and/or the long term?
12.1 The Commissioner, Ms Marianne Fischer
Boel, has distinguished between "technical" and "political"
(or "policy") simplification (speech in Brussels, 3
October 2006). The first "is about the detailed implementation
of policy, and sometimes about form", for example "revising
a legal document to make it clearer, or streamlining administrative
procedures". "Political simplification is about
changing underlying policies in ways which make them simpler.
For example, some say we should abolish production quota systems".
She intends to pursue both types of simplification and has proposed
a single Common Market Organisation for all or most agricultural
products, replacing 21 individual CMOs. She also proposes an Action
Plan, with "20 proposals for practical changes which can
make life easier for farmers, businesses and national administrations
without changing fundamental policy".
12.2 On the policy side, she has proposed
reforms for commodity regimes, such as those for sugar, wine,
bananas, and fruit and vegetables, and relaxing the conditions
for receiving certain commodity subsidies. The "health check"
may suggest certain adjustments in the new single payment system,
eg ending "the many exceptions to the principle of full
decoupling", a single type of entitlement, and an end
to set-aside. Finally, the budget review may question the very
existence of certain market instruments in the long term, ie a
new role for direct payments, and a "single model for decoupling",
after 2013. In her speech, the Commissioner was firm on the principle
of cross-compliance, ie payments for "the delivery of
public goods and services", as a means of winning "broader
support for our policy in the future".
12.3 We support all these proposals for
simplification, with caution over fraud from reduced paperwork.
However, with the possible exception of the vague hope of "a
new role for direct payments", they will not change the nature
of the current CAP, ie still significant market protection via
border taxes, and generous payments to farmers for little obvious
social or economic (or environmental) purpose or efficiency.
June 2007
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