Memorandum by the Food and Drink Federation
The Food and Drink Federation (FDF) represents
the UK's food and drink manufacturing industry, the largest manufacturing
sector in the country with a turnover in excess of £70 billion.
Our industry employs more than 500,000 people or 14% of the manufacturing
workforce. We are committed customers of UK farmers, purchasing
around two-thirds of the country's agricultural produce. To supplement
our raw material supply base, we also import around £7 billion
worth of ingredients for further processing. The UK is the world's
fifth largest exporter of value-added food and drink products,
exporting almost £10 billion worth in 2006.
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?
FDF member companies operate in an increasingly
open and competitive international market place. To succeed in
this environment, the industry must be able to access a steady
supply of raw materials that are safe, of high quality and competitively
priced. The CAP must underpin the competitiveness of the EU food
and drink industry by ensuring that adequate supplies of agricultural
raw materials at competitive prices are available for food production.
FDF believes the CAP's long-term objective should be a prosperous
and sustainable domestic agricultural sector that responds to
market signals and not state subsidies. Successive rounds of CAP
reform are shifting European agriculture in the appropriate direction,
but still further reform is needed to achieve greater market orientation.
The use of the word "Common" as in
the "Common Agricultural Policy" is key for food manufacturers,
as it is crucial that a level playing field exists amongst EU
Member States in terms of the various support payments made to
farmers to avoid market distortions for agricultural raw materials
sold to food manufacturers.
In FDF's view, the main pressures on the CAP
are finding the budget savings necessary to fund recent European
Union (EU) enlargements; and the need for a more efficient allocation
of resources, including land. A possible deal on the WTO Doha
Development Agenda (DDA) and the commitment to eliminate export
refunds will put further pressures on the CAP.
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?
FDF welcomed the 2003 CAP reform as it resulted
in: the decoupling of direct payments from production for cereals,
beef and dairy; reducing or abolishing intervention prices; Single
Farm Payments; and a greater focus on rural development with payments
subject to cross-compliance. FDF members are just now experiencing
the positive effects of the 2003 CAP reform. However that said,
continued reform is needed in order to move towards greater market
orientation.
It is fair to suggest that the EU's reform of
the sugar regime has not worked well. FDF's sugar processors are
concerned that if the current proposals to modify the Restructuring
Scheme do not succeed, there will be an across the board compulsory
quota cut hitting efficient and inefficient alike.
3. Do you consider the Single Payment Scheme
to be a good basis for the future of the 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?
The Single Payment Scheme is a good basis for
future EU agricultural policy because it moves towards greater
market orientation and it is WTO-compatible.
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
The CAP's market price support systems, when
combined with high EU import tariffs, mean that UK food and drink
manufacturers can pay comparatively high prices for key raw materials.
Raw material costs represent between 30 and 75% of our industry's
total operating costs.[1]
With the average food and drink manufacturer's profit margin rarely
exceeding 7%,[2]
it is clear that raw material prices can determine whether a company
makes a profit or a loss. Without further reform of the CAP and
the realisation of more competitive prices for key agricultural
raw materials, our industry may continue to downsize and move
offshore. A proliferation of bilateral trade agreements, which
provide nothing more than greater access to the EU market for
processed food and drink products from third countries, would
further exacerbate this trend. FDF has examined a number of CAP
market mechanisms which need further modification:
— Decoupling direct payments
from production is essential because it brings farmers closer
to the market, freeing them to produce agricultural products in
line with demand. The current system of allowing Member States
to decide the extent to which they decouple certain payments undermines
the European Single Market principle. Full decoupling would provide
the following economic benefits: encouraging a more efficient
allocation of resources; reducing administrative costs; increasing
opportunities for farmers to respond to new market opportunities;
and helping achieve necessary budget savings.
— FDF is opposed to the notion
of capping direct payments for large farmers, as it would
discourage the process of consolidation, so disadvantaging many
of the UK's large, efficient farmers by providing them with a
lower rate of per hectare support than their Continental competitors.
A reduction in payments to larger farmers could result in an inequitable
decrease in local production and a corresponding increase in prices.
— FDF believes that the existing
intervention systems—particularly for dairy and cereals—should
be phased-out as part of the 2008 "Health Check" as
they inhibit market fluidity and contribute to the maintenance
of uncompetitive commodity prices in the EU. As the European Commission
withdraws from market intervention, the likelihood of increased
agricultural price volatility could be limited through market
based risk management tools, for example futures markets and farmer-based
risk insurance systems.
— Production limiting programmes
such as EU milk quotas, lead to an inefficient allocation of resources.
FDF therefore favours an agreement to phase-out dairy production
quotas as these are preventing necessary industry restructuring.
— So long as the EU maintains
systems which produce artificially high prices for key raw materials,
it should continue to provide export refunds for processed
or Non-Annex One (NA1) products. These refunds are critical
to maintaining the competitiveness of the food and drink manufacturing
industry. NA1 export refunds provide compensation for high domestic
raw material prices and, therefore, the EU must ensure that it
continues to provide NA1 export refunds, so long as there is a
difference between EU and world market prices for key raw materials,
notably sugar and dairy products.
— FDF agrees that there is no
place for compulsory set-aside in a market-oriented environment
where payments to farmers are fully decoupled. Set-aside, in our
view, inhibits the efficient allocation of resources, discourages
farm consolidation and provides only questionable environmental
benefits. It is also inappropriate given the EU has agreed mandatory
targets to develop a large scale biofuels industry which will
lead to a significant increase in the demand for land to grow
crops for renewable energy in direct competition with crops for
food.
5. What is your view on the introduction of
the European Agricultural Fund for the 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?
N/A
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 I (direct payments) to Pillar
II (rural development)?
FDF supports compulsory, as opposed to voluntary,
modulation as this avoids competitive distortions between Member
States. However, any extension of compulsory modulation must be
linked to a review of Second Pillar measures to ensure their effectiveness
and to maintain food supply chain competitiveness. Consistency
across Member States is essential to avoid market distortions.
7. What benefits can the EU's World Trade
Organisation obligations create for EU agriculture and, consequently,
for the EU economy as a whole?
EU food manufacturers can benefit from WTO negotiations
through further trade liberalisation and a fairer and clearer
set of multilateral trading rules. The effect of the CAP and EU
import tariffs is that UK food and drink manufacturers pay comparatively
high prices for key raw materials. FDF members feel that the CAP
can benefit from WTO obligations by accepting ambitious tariffs
cuts as part of the Doha Development Agenda, in order to put downward
pressure on these raw material prices to safeguard the competitive
position of EU food manufacturers. FDF's sugar processors would
like sugar to be treated as a Sensitive Product in the negotiations,
although our sugar users would not as they are looking for lower
domestic prices.
Increased access to third country markets is
a continuing key goal for food manufacturers given its potential
benefits, even though many FDF members have already invested in
production key third country markets. Providing WTO obligations
are not damaging to the EU food and drink industry, FDF welcomes
them as they can help our members remain competitive.
WTO obligations should be adhered to, as trade
disputes can lead to the imposition of retaliatory sanctions that
create "innocent victims". Irrespective of whether the
EU wins or loses a WTO case, the domestic food and drink industry
frequently suffers as the target of retaliatory sanctions. These
sanctions either increase raw material prices or reduce export
competitiveness.
FDF members however do not support WTO Panels
rewriting understandings, implicit within existing WTO agreement
texts, in dispute settlement cases.
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?
FDF supports cross-compliance principles aimed
at promoting specified standards as it reinforces consumer confidence
in agricultural production and environmental protection.
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?
FDF believes that the 2008 "Health Check"
should consider the impact of agriculture on climate change. CAP
subsidies encourage certain production methods that contribute
to carbon emissions. The UK food industry is currently working
with the Carbon Trust on carbon footprinting. Farmers should therefore
consider their own carbon footprint to help mitigate climate change.
FDF supports the role that renewable energy
from agricultural sources can play in tackling climate change.
However, ready accessibility to agricultural raw materials is
essential for UK food and drink manufacturers to meet consumer
demands for food. As such, it is also a priority to ensure that
EU and national policies formulated to increase renewable energy
are managed in a way that avoids distorting the availability of
agricultural raw materials for food and animal feed. Existing
renewable energy policies have already had a significant knock
on effect on the availability and costs of some agricultural commodities,
which carry implications for consumer prices. FDF's current priority,
therefore, is to ensure that robust economic analyses and feasibility
studies are undertaken of land use, which is a critical factor,
and the increased demands being placed on it to avoid unforeseen
or adverse implications for food and feed supply and consumer
prices. As stated above, FDF agrees that compulsory set-aside
is inappropriate; given the EU has agreed to mandatory targets
to develop a large scale biofuels industry, which will lead to
a significant increase in the demand for land to grow crops for
renewable energy in direct competition with growing crops for
food.
10. The Commissioner has expressed her dissatisfaction
at the financing agreement reached by 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?
Clearly the budget needs to be sufficient for
the goals that the Council has set for the EU's agricultural policy.
FDF supports CAP reform in line with market orientation, which
implies a continuation of the trend of reduction already set for
the CAP budget overall. Our principal concern is to ensure that,
as CAP reform continues, the budget for essential elements such
as export refunds, which are needed to overcome the disadvantages
of market distortions, remains sufficient to allow international
trade to continue on a competitive basis.
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?
An impact of EU enlargement on the CAP is further
pressure on the EU's budget. More money is required for Pillar
1 payments and this could cause payments to be moved away from
Pillar II (as happened with the Budget settlement for 2007-2013).
This is a complicated issue and FDF broadly supports EU enlargement
because of the increased single market and new market access which
benefits FDF's members. However, it can be a difficult transition
with new Member States starting from different stages of development.
New Member States have also impacted upon EU levels of self-sufficiency
and the availability of raw materials in a complex set of ways
with differing impacts upon the internal market.
12. How could the CAP be further simplified
and what other ways would you like to see the Common Agricultural
Policy changed in the short and/or the long-term?
FDF supports the UK Government and the EU's
respective policy goals to reduce red tape and, in particular,
unnecessary burdens on business. Simplification of the CAP is
essential to reduce costs to operators and should continue to
be a main objective during the upcoming "Health Check".
FDF would like to see a suspension of the current bureaucratic
system for allocating NA1 export refunds, as this is unnecessary
given the current ample availability of funds in the budget. The
NA1 export refund certificate system is burdensome and complex
for operators. Given that there is no risk of exceeding the WTO
commitment of
415 million for spending on export subsidies, the
existing export refund certificate system should be removed. Monitoring
of the situation would be sufficient.
FDF disagrees with the European Commission using
its tendering system for Annex 1 products as a management tool
to determine the value of NA1 export refunds. Export refunds should
be paid to exporters of goods from the EU to third countries in
order to compensate for the difference between EU and world prices.
This is not happening, however, as the refunds are not compensating
for the difference in world and EU prices.
June 2007
1 Source: estimate from the Confederation des
Industries Agro-alimentaires (CIAA). Back
2
Source: CIAA. Back
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