Chapter 4: International models
The Common Agricultural Policy in context
141.Despite the fact that the EU trades in agricultural commodities in a globalised context, the structure of the CAP is unique to the EU. Witnesses told us about alternative approaches internationally to promoting resilience in the face of price volatility and extended periods of low returns. We had sought to identify the strengths and weaknesses of such approaches in an attempt to inform the discussion before the next round of CAP reforms.
142.The majority of the evidence focused on New Zealand, the United States of America and Canada. Before making direct comparisons, it is important to acknowledge the marked differences between European agriculture and agriculture elsewhere. In Europe, agricultural land and rural communities tend to be found in close geographic proximity, and sometimes in areas of natural beauty, ecological or cultural significance. As a consequence, the CAP seeks to support a range of public goods simultaneously. In the US, on the other hand, vast farms operate largely unhindered by requirements to conserve environmental features: the scale and organisation of agriculture in the US mean that it can be separated from other societal operations. The varying public policy tools that support agriculture in the EU and its international counterparts reflect these underlying differences.
New Zealand
143.The New Zealand model presents a radical alternative to the CAP. The High Commissioner, gave a compelling explanation of how in 1985, a range of agricultural subsidies were abolished overnight:
“I remember that there was no warning—it was just boompf. There were dozens and dozens of support systems, be it from the direct subsidy payments and supplementary minimum payments, through fertiliser subsidies to incentives to develop land—you name it, there must have been 30 or 40 different subsidies just wiped.”114
144.The High Commissioner argued that, ultimately, this change brought about greater efficiencies and enhanced innovation in New Zealand’s agricultural sector. He told us that in the past, “farmers farmed for subsidies” and spoke of the enormous efficiencies brought about within the sheep industry when subsidies were removed in the mid-1980s.115
145.At the same time, he told us that a relatively small number of farmers had left the industry as a result of the changes:
“It is simply the normal action of business that, when you face the prospect of going out of business, you make operation more efficient, and it is extraordinary how farmers in New Zealand have made their operations more efficient. Some went out of business. We had 80,000 farmers in New Zealand in the early 1980s, and 1% of them went out of business when the subsidies were wiped in 1985.”116
He went on to explain that the New Zealand Government had provided one-off exit packages and some financial advice to farmers to help with the transition.
146.Although there was a general consensus among witnesses that a gradual move in the EU away from public support was appropriate, there were doubts over the wisdom of such a radical and sharp change in policy as occurred in New Zealand. Moreover, additional steps would have to be taken if such an approach were to be replicated in the EU. Phillip Bicknell, of the NFU, argued: “My understanding of New Zealand and the impact there was that that was also accompanied by a devaluing of the currency, which helped them compete on export markets.”117 The Minister also mentioned the sharp depreciation in the New Zealand dollar that had helped them price themselves back into world markets, and also touched on further adjustments:
“In some areas, New Zealand also has a different approach from us on issues such as animal welfare. We have higher regulatory standards … We would want to try to safeguard that. We have a manifesto commitment to ensure that in the next round of CAP reform there is greater prominence given to issues such as animal welfare. It would not be quite as simple, in my view, as just following what New Zealand did, but that is not to say that there are not important lessons we could learn.”118
147.Though such a radical change in policy is unlikely to be adopted in the EU, one particular aspect of New Zealand policy may merit further attention. New Zealand operates an Income Equalisation Scheme designed to address farmers’ income variability. The scheme allows farmers to deposit income from farming for up to five years with the Inland Revenue, where it earns interest. The deposits themselves are tax deductible.119 According to the New Zealand High Commissioner, the mechanism allowed farmers to cope with volatility by depositing in a good year and withdrawing in a low income year to spread their income and reduce their tax liability. He had himself used the scheme in the past120.
148.Australia has a similar scheme called farm management deposits (FMD), which allows producers in years of high return to deposit money into a tax-free savings account held by a private financial institution. Australia also has five-year income tax averaging. 121
The United States of America
149.The United States Department of Agriculture (USDA) explained that agricultural policy in the US was governed by the Farm Bill, an omnibus legislative package. It told us that the 2014 Farm Bill amended previous agricultural and related policies and established new policies on a 5-year cycle:
“The 2014 farm bill debate took place in a period of high farm prices and record farm incomes, and centered on the replacement of fixed decoupled payments that went to farmers regardless of market conditions. A key element of the … debate was how to target commodity programs to provide a safety-net in time of unexpected distress and better help farmers manage risk.”122
150.One particular public policy tool arose time and time again in discussions about the American approach to supporting agriculture: insurance. As the US removed direct support, it began to support commodities through subsidised insurance schemes.
151.The USDA outlined the main benefits of government-backed insurance schemes. First, they told us that the schemes were a positive substitute for ad hoc disaster assistance because producers gained a direct role in managing their risks and participated in pooling risk with other producers, by providing net contributions in good years to offset losses in bad years. Second, they told us that from a budgetary perspective, the cost of a crop insurance programme was more predictable, because producers received indemnity payments in a timely manner when funds were most needed rather than having to wait for the processing of ad hoc disaster payments.123
152.The USDA was cautious about recommending such a scheme to the EU. The insurance market for agriculture in the EU is underdeveloped, and the evidence suggests that were the EU to move towards an insurance based model, premiums would probably need to be subsidised, as is the practice in the US. The Minister questioned whether the level of premiums would be affordable for farmers drawing on insurance schemes on a regular basis:
“Sometimes the difficulty is in insuring risks where there are regular calls on that insurance. Farming is famously a very risky thing to do because none of us can control the weather, and crops are particularly exposed. Sometimes, the cost that an insurance company will put on underwriting that risk is very high.”124
153.The Minister also questioned whether such a method of insurance would be best offered by the private or public sector and expressed caution about the complexity of the US model:
“The big argument against what they are doing in the US is that it is incredibly bureaucratic and administrative. We are in the business of trying to get away from an incredibly bureaucratic and heavily administrative CAP in Europe. We would like to move to something simpler and more logical.”125
154.DG AGRI explained that the two models were not directly comparable, and reflected significant institutional, budgetary and structural differences:
“US agriculture is characterized by a legislative process whereby the representation of farm interests in one legislative body is disproportionate to demographic reality, no budgetary constraint exists on farm policy implementation, and the agricultural sector is essentially supply-driven, relying on land abundance and on primarily bulk commodity production. It is thus rather simplistic, naive and deceiving to consider that such a comparison could be useful for EU agriculture.”
155.It added that another difference was that over 90% of US payments to risk management schemes went to just three crops—maize, wheat and soybeans.126
Canada
156.Under the Canadian Growing Forward 2 (2013–2018) policy initiative, a suite of programmes is in place to enable farmers to cope with variations in income over time and improve their resilience, collectively known as the Business Risk Management (BRM) tools127. These comprise:
- AgriStability—a margin-based programme that provides income support to an individual (or business entity) who declares agricultural income for tax purposes when that producer experiences substantial falls in earnings;
- AgriInvest—savings accounts for producers that provide flexible coverage for small income declines and support investments that help mitigate risks or improve market income;
- AgriInsurance—which provides producers with cost-shared insurance for natural hazards in order to minimize the financial implications of production and/or asset losses;
- AgriRecovery—a framework (rather than a single programme) that guides how federal-provincial-territorial governments work together to assess the impacts of disasters on Canada’s agricultural producers and respond with timely, targeted initiatives where there is need for assistance beyond ongoing programming.
157.The similarities between AgriInvest and the New Zealand Income Equalisation scheme are significant. The AgriInvest account builds as a farmer makes annual deposits based on a percentage of his Allowable Net Sales (ANS) and receives matching contributions from federal, provincial, and territorial governments. Since 2013, farmers have been able to deposit up to 100% of their ANS annually, with the first 1% matched by governments. The limit on matching government contributions is $15,000 CAD per year. The financial institution notifies Agriculture and Agri-Food Canada once a deposit has been made and the matching government contribution is credited to the account. This approach supports farmers who invest and take responsible long term decisions.
158.The Minister, George Eustice MP, praised the simplicity of the Canadian AgriStability scheme:
“The US has one, which is very complex and looks at different incomes, state by state, crop by crop. It makes it a very difficult scheme to manage administratively. Most people would agree that the Canadian model is probably the simplest, where they simply target a sharp fall in farm incomes and basically take that as a proxy for something going wrong in the sector, either with price or indeed with crops … I think the Canadian model is the closest we have got to an insurance scheme that works, just because of the complexity of the US model.”128
He went on to say that the EU might be able to learn lessons from the Canadian model in the next round of CAP reform, and could even design a system that was simpler still.
159.There are fundamental differences between the organisation and structure of the EU agriculture sector and those in Canada, New Zealand and the US, especially with regard to scale and amenity and environmental use of land. These differences render the models used by these countries unsuitable for general application in the EU at the present time.
160.Even though the Canadian and US experiences have rather different contexts, lessons can be learned on where and how subsidised insurance and disaster compensation may be applied.
161.We recommend that the Commission and the UK Government undertake a structured review of public investment deposit schemes in other countries, with a view to identifying approaches that would work in the EU. This would give farmers a secure and guaranteed option to save in times of plenty and withdraw in times of need.
119 New Zealand Inland Revenue, Income equalisation scheme : http://www.ird.govt.nz/business-income-tax/
income-equalisation/income-equalisation-index.html [accessed 5 May 2016]
127 Agriculture and Agri-Food Canada, List of Programs and Services (5 April 2016): http://www.agr.gc.ca/eng/programs-and-services/list-of-programs-and-services/?id=1362151577626 [accessed 5 May 2016]