Memorandum by the New Zealand Government
SUMMARY
1. The efforts by the European Union (EU)
to reform the Common Agricultural Policy (CAP) are commendable.
Not only were the 2003 CAP reforms far reaching, but, more importantly,
they (and current proposals) are leading the EU in the direction
of greater market orientation and reducing distortions to international
trade.
2. New Zealand's own policy shift towards
market orientation was supported by our farmers, who saw the advantages
of this change and who remain strong proponents of reform. They
prefer to be reliant on markets rather than the whim of government
policy for their incomes. The New Zealand agricultural sector
and the wider economy has benefited from those reforms. Europe
should experience similar gains from any comparable market-oriented
reform.
3. As a party directly affected by the CAP
(on EU and world markets), New Zealand will, therefore, continue
to be vitally interested in proposed CAP changes. New Zealand
will also continue to engage with European Commission and Member
State colleagues on the implications of those proposed changes,
in particular for their trading partners.
4. The upcoming "health check"
and budget review, aside from a reduction in CAP spending and
further movement towards a wholly decoupled system, should ensure
that the most is made of the intended gains of reforms. The health
check should also send clear signals as to the direction and speed
of further reform to facilitate the agricultural sector preparing
itself for the structural adjustment required.
INTRODUCTION
5. New Zealand welcomes the opportunity
to comment on progress to date with the 2003 CAP reforms and to
examine what further policy changes at the EU level are required
in both the short-term, and beyond 2012.
6. New Zealand's reference points in making
this submission include:
— a significant domestic policy shift
towards market orientation in New Zealand almost two decades ago;
— New Zealand's experience as an exporter
of agricultural products to the EU and the rest of the world;
and
— a desire to see a minimisation of
distortions in international trade and consequential resource
misallocation, consistent with numerous international declarations
on development and sustainability.
When making an oral submission on the topic
of the future of the CAP, New Zealand can provide more detail
on the policy shift that took place in the 1980s.
7. Agricultural production and exports of
agriculture products are critical to New Zealand's economic and
social wellbeing. The bulk of New Zealand's production of these
goods is exported and accounts for more than half of our foreign
goods trade receipts. As a long-time exporter of pastoral and
fruit and vegetable products to the EU, and as a country forced
to compete with subsidised EU products on world markets, New
Zealand has a strong interest in the evolution of the CAP.
8. While usually thought of as a developed
country, New Zealand shares many common interests with developing
countries, which are similarly dependent upon agricultural
exports, and which have experienced the negative flow-on effects
of the CAP, both in their own markets and through the spill-over
effects in international markets. The views expressed by New Zealand
would therefore be shared by many developing economies, for example
those demonstrated by the Membership of the Cairns Group of countries
that work together in the context of World Trade Organisation
(WTO) agriculture negotiations.
OVERVIEW
What should the long-term objectives of the CAP
be? 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?
9. It could be argued that the original
CAP objectives have either been met or are no longer appropriate.
This is in the context of a much larger and diverse EU following
its enlargement to 27 Members States, and in a substantially altered
international setting, where globalisation and internationalisation
have radically changed the relationships between economies. These
developments have led to a greater appreciation of the negative
spillover impacts of some national policies into the global domain.
They have also increased awareness of the benefits of economic
liberalisation for world social and economic wellbeing.
10. The EU has an opportunity to recast
the mould post-2013. In this changed global environment, the United
Kingdom (UK), the EU, and New Zealand are now facing largely the
same pressures and challenges in agriculture, such as climate
change, food safety issues, and biosecurity. It is thus sensible
to expect that our policy objectives may look similar long-term,
although reflecting our geographic and other differences. Therefore,
we could see an ideal set of objectives for the future CAP
as including:
— to provide for the orderly structural
adjustment of the rural sector away from dependence on market
support measures via subsidisation (Whether the latter be developed
through price support, direct payments linked to output, inputs
or price, export subsidies, or border protection);
— to provide a policy environment conducive
to EU producers continuously adjusting farm scale, and methods
and types of production in ways which make them internationally
competitive;
— to provide frameworks for the efficient
operation of markets as the key means of allocating resources
used for agricultural production;
— to ensure food safety and biosecurity;
— to provide for an effective innovation
system;
— to provide policy frameworks which
foster the long-term sustainability of the EU's natural resource
base of land, water and air, and the maintenance of biodiversity;
— to provide a legal framework for
the protection of animal welfare; and
— to otherwise limit the scope of governmental
regulatory intervention to clear instances of market failure.
11. Such a set of objectives would closely
mirror New Zealand's agricultural policy objectives. While
EU agriculture may have different historical roots, justifying
a more extended adjustment pathway, the end-game is the same as
that for New Zealand.
12. Since 1992, the EU has achieved substantial
reform of its agricultural policy, in particular in terms
of the move away from direct price support, market intervention
purchasing, export subsidies for surplus disposal, and the move
toward greater direct support of farmers, most latterly via the
Single Farm Payment (SFP). These developments have been publicly
welcomed by New Zealand and would also have been welcomed by many
developing agricultural exporting countries (with the qualification
that sugar and certain Mediterranean-related product sector reforms
have been much delayed).
13. EU farmers still, however, receive considerable
subsidies via the effects of high import tariffs (accompanied
by export subsidies) and some continuing commodity-linked payments,
which directly impact on the prices of farm products. Further,
while direct payments are clearly less distorting than price support,
they still deliver indirect support. This maintains resources
in agricultural uses which would otherwise flow to other, more
efficient uses.
14. It would be beneficial to UK farmers,
the EU economy, and to those economies heavily dependent upon
agricultural exports if ongoing EU reforms led to reduced use
of such instruments, and focussed more on the facilitation
of structural adjustment of the EU's rural economy. It will,
of course, take time for a new market-driven focus to develop,
but the EU is able to provide funding to assist farmers through
difficult transitional periods. New Zealand did not have such
a mechanism at the time of its reforms, aside from a write-down
of farm debt for some farmers, and an exit package for those farmers
who still remained deep in debt following this and who had little
prospect of future viability.
THE REFORMED
CAP
What has been your experience so far with the
reformed CAP? What has worked well and less well? And where can
lessons be learned?
15. New Zealand's experience with the reformed
CAP has been in relation to our exports into the EU and on the
world market. New Zealand welcomed the 2003 reform, which based
the new support system almost entirely on decoupling payments
from production (although we note that some Member States have
chosen to maintain some partially coupled supports). The introduction
of the "cross compliance" concept, linking the SFP to
respect for environmental, food safety and animal welfare standards
was also positive.
16. Agricultural subsidies and border protection
negatively affect agricultural exporting countries. They tend
to create an oversupply of agricultural products inside the protected
market, considerably limiting the export of agricultural goods
to the protected market. Subsidised exports result in unfair competition
in international markets. The much-anticipated reform of EU sugar
subsidies was therefore a step forward on the path of subsidy
reform.
17. Although the reformed CAP now has greater
market orientation, the benefits would have been greater if all
Member States had made full use of the scope for converting
commodity-linked payments into the new SFP. It is very important
that the "health check" results in a reduction in the
flexibility for Member States in implementing reforms and therefore
makes the most of their intended gains.
18. The reduction in export subsidisation
by the EU since 1994 has had a material positive impact in international
markets benefiting both the EU budget and agricultural exporters,
including New Zealand. This is a welcome policy change.
19. The EU's 2003 reforms represent a major
step forward for the EU. The CAP in 2006 should, however, be seen
as a work in progress, if the EU foresees a similar end-goal for
the agricultural sector. Features such as ongoing partially coupled
payments, intervention systems and export refunds prevent full
market signals getting to producers, and do not address all of
the new and emerging challenges facing agriculture. The review
processes underway with the health check and budget review offer
an opportunity to better orient the current CAP to address these
issues.
THE SINGLE
PAYMENT SCHEME
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 longer-term?
20. While the SFP is a very good transitional
step, support payments should be progressively phased out,
allowing time for markets to adjust in an orderly fashion, in
particular the market for land, given that historic subsidy levels
have been capitalised into artificially high land prices. Sweden
recently became the first EU country to take the position that
all EU farm subsidies (except those related to environmental protection)
should be abolished. New Zealand strongly supports this position.
(New Zealand does not have any measures similar to the SFP, and
nor was such a scheme a feature of our own reform process).
21. This will result in the determination
of resource allocation by way of relative prices for products,
a highly desirable outcome for European Member States, their consumers
(who will benefit from wider choice and lower prices), and for
the international competitiveness of their producers and the wider
economy. As the SFP is based on 2000-2002 subsidy levels, individual
farmers will not see any immediate difference in their income.
Consequently, there may be little effect on production levels
in the short-term, an expectation supported by recent research.[1]
22. The SFP is also positive in the sense
that it removes disparities in assistance levels for different
products. Over time it may offer an opportunity to reduce direct
support to farmers, particularly those larger or higher-income
farmers most readily able to cope with the economic impacts of
reform. Future policy reform should be as simple as possible
without acceding to special cases except where a "one
size fits all" policy would result in grossly inequitable
outcomes involving significant economic hardship.
MARKET MECHANISMS
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
23. EU "market mechanisms", including
intervention purchasing and export subsidies, have been abolished
or reduced in some agricultural sectors, which is a positive step.
The ideal next step would be a progressive removal of such
mechanisms across the board, full decoupling and, if the SFP
is continued, making it applicable to all agricultural sub-sectors
previously subject to price support. The European Commission appears
to share this view, and its upcoming proposals for the "health
check" could promote this process. If the EU is to achieve
a truly market-orientated agricultural sector, removing remaining
distortionary measures will be key to creating a "level playing
field" and therefore provide incentives for farmers to take
an innovative approach to their product mix.
24. In New Zealand's case, the high levels
of price support were negatively reflected in resource misallocation.
The most common example relates to the sheep sector—since
the reform period New Zealand's sheep numbers have fallen dramatically,
from 70 million to 40 million today, yet export revenues from
these smaller numbers have risen. Also of note is that marginal
and easily erodible land has been taken out of production. The
sector as a whole has become leaner and more efficient.
25. We note that the EU's dairy sector remains
an exception to the newly-reformed norm, but that changes are
expected in the near future. The eventual elimination of dairy
production quotas will be key to this, but must be done carefully.
Dairy production quotas should remain in force until the
EU has permanently ended export subsidies and reduced its currently
high tariffs to very modest levels. If dairy production quotas
are freed-up prior to export subsidy elimination and tariff reform,
there is a great risk that the EU dairy sector may expand significantly
in response to prices which could be well above international
levels. This would be to the detriment of other EU sectors which
have lower levels of protection, as well as non-subsidised exporters
(such as New Zealand). The EU itself would then also be faced
with a more difficult adjustment process when tariffs are subsequently
reduced following the WTO Doha Round or other trade-liberalisation
measures.
26. Proposals to remove the set-aside
of land are encouraging, as this is a hangover policy designed
to avoid some of the negative economic effects of price support
measures and reduce the environmental detriments of such support
mechanisms. Non subsidy-based regulatory interventions now may
be more appropriate to deal with residual environmental objectives
not achieved by the removal of price subsidies. Such measures
might include, for example, land-use requirements and mandatory
biodiversity corridors. New Zealand has not applied a concept
such as set-aside, but does successfully address environmental
objectives through a range of regulatory initiatives.
27. Export refunds, which have been
a key mechanism for transferring the costs of excess EU supply
to economies reliant on international markets, should be eliminated.
Export refunds represent one of the most undesirable aspects of
the CAP, allowing the EU to capture perceived strategic benefits
in terms of domestic self-sufficiency at the direct, and large,
expense of those economies which suffer from the resulting international
market price volatility and depression impacts.
28. High EU tariffs are another market
mechanism where there should be some substantial downward adjustment.
Until such changes are made, the EU and the rest of the world
will suffer substantial resource misallocation costs.
RURAL DEVELOPMENT
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?
29. Support for rural development is beneficial
where it is aimed at improving the efficiency, and thus international
competitiveness of, European agriculture, which should eventually
enable the EU's rural economy to exist without support. The EU
should be mindful, however, that the establishment of rural development
funds can potentially have the same indirect effect on output
as price subsidies and, to a lesser extent, direct payments. In
other words, such funds should be aimed at meeting the specific
and targeted needs of rural society, rather than acting as
a channel to fund further support of the EU's agricultural sector.
WORLD TRADE
What benefits can the EU's World Trade Organisation
obligations create for EU agriculture and, consequently, for the
EU economy as a whole?
30. The EU's current WTO obligations have
served to reinforce and "lock in" the EU's unilateral
reform programme. The move from price support to direct payments
has revealed more clearly the real economic costs of a high level
of agriculture sector subsidisation. The fiscal impact of these
"on budget" costs will serve to provide incentives to
EU governments to continue the overall reduction of farm support.
31. While food costs are not a large
proportion of average EU household budgets, they impact on wage
costs and, through that mechanism, have an impact on international
competitiveness in industrial goods and services (which are, by
far, the largest contributor to the EU economy). New Zealand has
one of the lowest tariff profiles in the world, including for
food and beverages. This has benefited consumers who enjoy a wider
range of products at lower (world) prices, and producers who benefit
from the competition.
32. Overall, past reforms have benefited
the EU via economic welfare gains, and from reduced environmental
degradation and improved sustainability of farming and natural
resources. The EU's policy goals associated with assisting the
economic development of developing economies are being well served
by the reduced negative impact of subsidised exports. However,
there is a considerable opportunity for further gains through
the elimination of export subsidies, and progressive opening
of the EU's borders to imports.
ENVIRONMENTAL PROTECTION
AND CLIMATE
CHANGE
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? 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?
33. The introduction of cross-compliance,
and refocusing of the CAP on environmental objectives is
a useful first step to encourage farmers to act in an environmentally
sustainable way. The removal of subsidies will reduce the
incentive to increase output in a way unrelated to market demand,
thereby reducing the pressure on the environment and resulting
in improvements in water quality, biodiversity, and sustainability
of other natural resources. A reduction in livestock intensity
will promote a reduction in greenhouse gas emissions, and water
in air contamination from animal effluent.
34. In terms of new policy, New Zealand
has a taxation (polluter pays) and regulatory-based approach
to environmental protection, rather than a subsidy-based approach
(there is no need for a New Zealand cross-compliance system as
New Zealand farmers do not receive subsidies). The key measures
include:
— the fisheries quota management system
(1986);
— the Resource Management Act 1991,
which codifies sustainable management of natural and physical
resources into legislation;
— the Biosecurity Act 1993, the purpose
of which is to exclude, eradicate, or effectively manage pests
and unwanted organisms;
— the Hazardous Substances and New
Organisms Act 1996, which governs the protection of the environment,
and the health and safety of people and communities by preventing
or managing the adverse effects of hazardous substances;
— the Agricultural Compounds and Veterinary
Medicines Act 1997: to prevent or manage risks from agricultural
compounds to trade in primary produce, animal welfare, and agricultural
security;
— the Local Government Act 2002, which
gives local authorities a role in promoting social, economic,
environmental, and cultural well-being of communities; and
— New Zealand's Sustainable Development
Plan of Action (2003), which guides policy and decision-making
by using sustainability principles as well as focusing on four
key issues affecting New Zealand, including quality and allocation
of fresh water, and energy.
35. The recent inclusion of agriculture
and forestry in an economy-wide emissions trading scheme (ETS)
is a critical element in the New Zealand Government's recently
announced mitigation response policy package to the challenge
of climate change. By making producers liable for greenhouse gas
emissions while rewarding the creation of carbon sinks, the policy
is expected to encourage the adoption of less greenhouse gas intensive
forms of agricultural production and expand farm forestry activities.
36. At the same time, the New Zealand Government
recognises that farmers currently have limited technical opportunities
to reduce emissions without reducing agricultural output, and
is therefore phasing in the inclusion of agricultural gases in
the ETS, while making available substantial funding for research
into the development of emission reduction technologies. Other
complementary policies include:
— technology transfer activities (including
new tools for measuring and monitoring emissions at the farm level);
— education programmes on existing
opportunities to reduce emissions and emerging technologies and
practices; and
— an afforestation grant scheme (providing
incentives for the creation of carbon sinks) for smaller farm
foresters not wishing to be part of the emissions trading scheme.
37. Climate adaptation is another
important area for New Zealand. Significant funding is being provided
for research and technology transfer activities into how best
farmers can respond to the changing climate, in particular the
likely increase in the occurrence of extreme weather events such
as flooding and droughts.
38. New Zealand also places importance on
the use of biofuels, and is looking to encourage uptake
of fuels that are produced from sustainable sources.
FINANCING
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?
39. The recent CAP reforms have been far-reaching
and are heading in a desirable direction, but, from an outsider's
perspective, the level of financial support for agriculture
in the EU remains high and continues to be linked to retention
of resources in the sector. This is at the cost of EU consumers
and society, as well as the EU's trading partners, notably developing
countries. Any increase in the CAP budget (particularly as it
accounted for 45.5% of EU expenditure in 2005, predicted to decline
to 32% by 2013) would not be recommended. Even with modulation
moving funds to rural development programmes, the funding remains
in the agricultural sector.
40. New Zealand observes that for some Member
States, the imposition of costs on national budgets may serve
as an incentive to moderate expenditure. Co-financing, however,
risks a trend towards re-nationalisation of agricultural policy
with a loss of transparency, reduced policy cohesion, and efficiency
losses.
ENLARGEMENT
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?
41. New Zealand notes that the recent enlargements
of the EU from 15 to 27 Member States have greatly changed the
face of the EU, and the agricultural sector in particular. The
introduction of new agricultural land, with huge potential for
productivity improvements creates new challenges and opportunities,
which may require new policy responses. These, and any further
enlargements that might follow, are likely to reinforce the current
incentives and pressures for reform along the established line.
Enlargement can provide a stimulus for greater competitiveness
in the agricultural sector.
SIMPLIFICATION OF
THE CAP AND
OTHER ISSUES
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?
42. The ongoing simplification of the CAP
will be important for the future of EU agriculture, and should
enable farmers to focus more on farming than on administration.
Clearly, the elimination of all subsidies and indirect supports
would also make the CAP simpler, but we appreciate that such a
step will take time.
43. For New Zealand, the gains from agricultural
sector reform in the context of a major economy-wide reform have
been substantial—and may be a useful reference tool. The
critical aspects of reform have been the development of a level
playing field, not only within the agricultural sector, but across
the economy. This was achieved by the removal of subsidisation
and allowing markets to be the prime factor determining resource
allocation. The New Zealand Government has abolished almost
all agricultural assistance (except in the event of severe climatic
disasters, outbreaks of plant or animal disease, or for the provision
of innovation funding). This has resulted in a much simplified
agricultural policy.
44. The New Zealand Government, in regard
to agriculture, now focuses its attention on:
— multilateral trade liberalisation;
and
— other regulatory frameworks.
45. In the EU or elsewhere, national welfare
is enhanced by gains in productivity. New Zealand found
that its mid-1980's reforms had a markedly positive effect on
total factor productivity in the agricultural sector. This total
factor productivity averaged 2.5% a year in the post-1984 period
(after a three year recovery period) compared with 1.5% beforehand.
This is because the reforms enabled the sector to improve its
allocation of resources and level of responsiveness to global
market signals as well as to maximise cross-sectional synergies.
General agricultural productivity growth since the economic liberalisation
of the mid-1980's has been three times greater than in the rest
of the economy.
46. More specifically, the pattern of farm
output has changed:
— Sheep and beef: The national
flock decreased from 70 million in 1983 to around 40 million currently.
(There are now 31% fewer sheep and beef farms). Lambing percentages
have increased by 25% and average carcass weights have also increased
by 25%. Export revenues (in value-added product) from the sheepmeat
sector now exceed those generated by the former 70 million-strong
flock ($2.25 billion in the year ended 31 March 2007).[2]
— Dairy: The number of dairy
herds fell by 17% from 16,000 in 1983 to 13,000 in 2004, but the
national herd size increased from 2.3 million to 5.3 million,
the average herd size increased from 150 to 330 (2006), and there
has been a 75% increase in the volume of dairy production (with
exports worth $8.41 billion in the year ended 31 March 2007).
— Deer: New Zealand only had
a very small deer industry in 1984. New Zealand's export earnings
from deer are now $260 million (year ended 31 March 2007).
— Horticulture: In 1983 New
Zealand exported $55 million worth of kiwifruit and $185 million
worth of other horticultural exports. In the year ended 31 March
2007, it is expected more than $759 million worth of kiwifruit
alone, and nearly $1.12 billion worth of other horticultural products.
— Wine: The reforms had a significant
impact on the development of New Zealand's wine sector. It has
been a growth industry: exports were worth less than $13 million
in 1984 and had increased to $660 million in the year ended 31
March 2007.
— Farm income: Currently approximately
705 of New Zealand farms have some form of off-farm income either
via off-farm work or investments, or other initiatives such as
rural tourism.
47. Agriculture is a hugely diverse sector
in the EU, which has developed structural rigidities as a result
of both legal structures for land tenure, and a long history of
subsidisation which has prevented ongoing adjustment. We accept
that these forces and the rigidities they have induced cannot
sensibly be unwound in a short time frame as was done in New Zealand.
48. Therefore, the signalling of a clear
medium-term policy direction is essential to the achievement of
an orderly pathway of adjustment and to give producers the regulatory
certainty they need to make investment decisions. This applies
in particular to adjustment in the market for agricultural land,
as the historical level of subsidy has become capitalised in land
prices.
49. Time is required to allow the necessary
correction to occur and transitional measures are required. It
must be recognised, however, that when second or third-best policy
approaches are applied, the chances of interventions having unwanted
and negative impacts is high. The design of transitional mechanisms
presents significant challenges. Shorter adjustment pathways
are therefore preferable in order to minimise the economic costs
of adjustment.
October 2007
1 Farm Level Adjustment in Ireland Following Decoupling,
Teagasc Rural Economy Research Centre. Back
2
Note all figures in New Zealand dollars. Back
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