The farm lobby’s supporters in the European Parliament are clearly determined on only minimal adjustments to the common agricultural policy in return for guarantees of the continuation of the €55 billion a year largesse from the taxpayer. Deliberations in the Agriculture Committee indicate strongly that MEPs will not support the Commission’s very modest plans for ‘greening’ the CAP until details of the new post 2013 budget provisions are known. Even less are they prepared to commit to reform in advance of a new multilateral trade agreement in the Doha Round.

Apparently guaranteeing every farmer in the EU27 an average €250 a hectare before they set hand to plough is not enough to ensure that they also perform minimal environmental stewardship functions. With arable farm profits at an all time high, there is certainly little justification for perpetuation of the single farm payment on income support grounds. This does not prevent the farm industry’s parliamentary supporters arguing that more market competition likely to result from an eventual Doha deal should automatically justify even more financial compensation.

This argument conveniently ignores the principle embodied in the original reform accords of the the last two decades that income subsidies were designed to alleviate possible farm income shocks resulting from adjustment to a more competitive, market oriented agriculture policy. In other words, a transitional and temporary policy. The approach laid out in the report by the Agriculture Committee’s rapporteur Albert Dess with ‘green subsidies’ to be financed out of Pillar 2 of the farm budget, rather than the main subsidy disbursing Pillar 1, can only lead to increases in overall subsidy expenditure.

Meanwhile, at government level, the ministerial majority continue to pursue the red herring of the alleged role of speculators in inflating food prices and depriving farmers of income. So obsessed is President Nicolas Sarkozy and his cohorts with this issue that the French President has put it at the top of this year’s G8 and G20 agendas, and is summoning G20 agriculture ministers to Paris in June to discuss it in detail.

Unsurprisingly, there is considerable scepticism on the issue among a freer trading minority. While the French Government maintains that controlling financial speculators is necessary to prevent their allegedly destabilising food commodity markets, the British and Brazilian Governments are proposing an alternative prescription to improve food security: increased food production and the eradication of trade barriers. This, they argue, is the only way to smooth food price volatility in the long run. A statement by the two governments doubts whether derivatives markets actually increase volatility. “In principle, they should help to reduce volatility on spot markets,” a joint declaration states and stresses that financial instruments must remain “fully available” to producers and consumers “to enable them to manage the risks of price volatility”.

Paying more subsidies to European farmers, or even maintaining them at present levels, will contribute little or nothing to improving global food security.

If governments pay subsidies on or protect a productive process then it is inevitable that the price of the factors involved in that production will rise. In the case of agriculture the most obvious example is the effect of subsidies on the price of land. In their most extreme form, subsidy systems have the effect of putting a value on even the legal right to produce a commodity – the EU milk quota being the most outrageous example. This phenomenon was identified long ago by such economic luminaries as David Ricardo and Adam Smith. Incredibly, however modern governments still appear to be incapable of grasping the inevitable consequences of such interference with the market.

This fact has however at last been officially recognised by the European Commission’s leading agricultural analyst, Tassos Haniotis. In a recent conference paper the head of economic analysis at the Commission’s agriculture department, admitted “Farmland prices are partially based on the level of subsidies that they generate, as well as other factors such as commodity prices.”

The Commission has long since denied that an income subsidy paid direct to land holders would have any effect ion the profitability of farming and therefore on levels of output. It has steadfastly maintained that the income function and the profitability or otherwise of commercial farming would be entirely separate. The reality is that if a government department pays a land holder €250 a hectare for merely occupying land (he does not have to actively farm it to draw the subsidy) it is clear that the value of that land will increase to take account of the subsidy entitlement. Its value can be seen by considering someone occupying 100 hectares of land for example, who can sit and do nothing all day and still draw a substantial €25,000 a year from the EU subsidy pot.

The important point that Haniotis was making is that once a subsidy and protection policy has jacked up the price of agricultural inputs – most importantly of land – it is extremely difficult to wind such policies down. In such a situation it is not the sit and do nothing lotus eaters who would be seriously damaged, but the commercial farmers who finance their operations on the basis of mortgages on their over-valued land. The security of such expensive land is their main asset. Remove the subsidy and the whole financing structure of the the industry would collapse0.Warns Haniotis: “Redistributing direct payments among member states and within member states will affect asset values, and we’re going to see it start touching some of the most competitive member states.”Quite.

It is now generally accepted that if an expected world population of 9+ billion by 2050 is to be adequately fed, world food production has to be massively increased. Estimates vary on how much, the actual figure depending on the extent that growth in the ‘emergent’ economies triggers a switch to a more animal product oriented diet. What is clear is that production will have to be increased without using more land, with less energy input and with less pressure on the environment.

Put crudely and to oversimplify: more has to be produced from less. This in fact is how, principally, the ever increasing world food production and the continuously falling real price of food was achieved in the last three decades of the last century. Massive increases in agricultural productivity – principally through continuous yield increases – were achieved in the United States, Europe and in developing countries. And the increase arose from the application of science, principally to plant breeding but also to husbandry methods.

The rate of increase in productivity has however fallen off – just as the demand is rapidly increasing from newly prosperous countries with inadequate food production resources of their own. The major reason for this is the declining allocation of cash to agricultural research by both governments and private companies.

The UK Government’s chief scientific adviser Sir John Beddington sees the decline in the agricultural research effort as a product of the fall in food prices over recent decades. He is not alone in this view. Other scientists and researchers at a joint European Commission Joint Research Centre (JRC) and UK Government Office for Science forum this week agreed with the Beddington view.

The plenitude of food on world markets may well have lulled governments into a very false sense of security, encouraging their lack of enthusiasm for backing increased research. but this is not the only reason. While the returns to scientific innovation in agriculture may have declined, the costs of application have magnified, principally because of the mounting regulatory and political obstacles to practical application of new methods and materials. The application of genetic modification to plant and animal husbandry is an atypical example.

Much more insidious, is the anti-science attitude of too many legislators fostered by environmental obsessives whose ‘feelings’ play a much larger part in their actions than their brains. The reality is that the world needs a new Green Revolution – and soon. Unless a lot more is invested in agricultural research and the obstacles to its application reduced a lot more people are going to starve.

It was entirely predictable that EU farm ministers would respond to the European Commission’s post 2013 CAP reform proposals by agreeing on a policy direction which would ensure that there can be no radical change in the Union’s €50+ billion a year common agricultural policy. What was however surprising, even to hardened farm council watchers, was the blatant disregard for the financial stress which the EU and individual member states currently face.

Anyone doubting the determination of the agricultural policy makers to continue on their time honoured track need only consider the first statement in the concluding communiqué of the March 17 meeting. It notes that “the future CAP has to remain a strong common policy, and with regard to the EU budget, should have financial resources which are commensurate with its objectives, without prejudice to the decisions on the EU’s Multiannual Financial Framework post-2013”

While even lawyers will often dispute the true meaning of the phrase ‘without prejudice’, in this context it clearly means that whatever it is necessary to spend on protecting and supporting farm incomes must be spent – without danger of limitation by the conclusions of the wider budget review. Whatever cuts have to be made in other policy areas, CAP spending is sacrosanct.

Overriding the views of the would-be reformers in Council, the communiqué goes on to restate the intention to maintain the CAP status quo largely unchanged. Underlining the majority view that direct income support to EU farmers is essential to “ensuring a

fair standard of living for the agricultural community”, it goes on to maintain that it “also enhances the provision of public goods and services by farmers for which the market does not pay”. A contention strongly contested by many leading economists and environmental analysts. The one does not follow automatically from the other.

The Council statement reaffirms that direct subsidies “will remain an essential element in the CAP towards 2020, notably in the context of the additional costs producers face in meeting the EU’s high environmental and animal welfare standards.” The latter statement being again highly contentious, given that more competitive agricultural exporters elsewhere in the developed world have to meet similar or even higher standards.

What’s more, dear taxpayer, if you want more environmental and welfares conditions, they are going to cost extra; they will not be applied at the expense of existing subsidy handouts. That is the plain language interpretation of the communiqué statement that: “Any further greening should be simple and cost-effective, avoid any overlap between pillars and must be based upon the experience of the CAP’s current green policy measures”.

And what’s more, the Council is going to maintain the ‘belt and braces’ approach through maintenance of market protection and market manipulation, if annual handouts of €300 a hectare do not adequately maintain farm incomes – and if necessary we could need more. The Council “broadly agrees that existing market measures continue to constitute a necessary safety net and that greater flexibility and quicker deployment in the application of measures by the Commission is required.”

There is nothing in the communiqué which demonstrates any new thinking whatever. If any proof were needed that the ministers will back only a no-change approach for the post 2013 policy they only need to heed the words of French Farm Minister Bruno Le Maire at the conclusion of the March 17 meeting : “It’s a strong political signal of support by governments for the CAP, and for strengthening it in the years to come.” Enough said.

The most recent meetings of the European Union’s farm ministers have given a pretty clear indication that any changes which may take place in the common agricultural policy are unlikely to be more than cosmetic. After much wrangling in the Special Committee on Agriculture (SCA) and in the Council of Ministers itself, a completely anodyne draft communiqué for the latest meeting eventually emerged. It carefully papered over the massive fissure which undoubtedly exists between the Anglo-Scandinavian reformers and the solid rump of defenders of the faith of CAP orthodoxy.

This was clearly demonstrated by the fact that the nearest that the Council will ever get to change was the SCA suggested conclusion that any further CAP “greening” should be simple and cost-effective, must avoid an overlap between pillars and must be based on the CAP’s current green policy measures. In plain language this means: “We don’t mind a few more environmental additions but don’t mess about with the basic subsidy and market support system.”

The various versions of the communiqué agonised over by the SCA contain some corking non sequiturs. Example 1: “Considering that the overwhelming volume of CAP support is decoupled, there is a broad agreement to continue voluntary coupled support in sensitive sectors and in certain regions while maintaining the integrity of the internal market.” If direct, production linked subsidies are maintained only in certain regions then competitive equality in the whole internal market is impossible.

Example 2: Apparently the phrase “appropriate” financial resources for a “strong CAP”, was substituted for previous draft versions which had read “provision of commensurate” resources. Why split hairs? Either wording really means “we shall demand as much money as is needed to maintain our prolix policies – as we have always done”. And no doubt the European Council and the Finance Council will continue to nod through the CAP’s €50+ billion a year with only the usual token protest from the CAP agnostics.

But with yet another phase of CAP modification under way, there are plenty of views and opinions being bruted about on what should be done rather than what will be done. One of the more credible, the more so because it comes from within the farming and food industry, is the view of Chris Haskins – Lord Haskins, farmer and one time food processor (claimed inventor of the ‘chicken nugget’). In a Centre for European Reform Brief, Haskins wades through all the issue currently bearing on any possible or probable CAP reform.

While many will disagree with his view that farm income subsidies should be maintained to 2023 and beyond, his assessment of the food security issue is likely to have considerable political resonance. If the world is to be adequately fed in 2050 we need to stop hamstringing scientists and innovators and get on with the job of increasing global food production.

Climate change and limits on fertiliser, pesticide and energy inputs could put a severe strain on the capacity of the world to produce enough food, unless governments respond appropriately, he argues. “The European Union should therefore substantially raise its investment in agricultural research, to improve yields, to develop plants which can cope with the extremes of flood and drought, and to enable its farmers to grow more food. If this happens, Europe could well become a major source of food for other parts of the world struggling to cope with a combination of population growth and climate change. The Commission should organise collaborative agricultural research across the EU rather than leaving each country to go its own way.”

Retail prices of food, according to a UK bank, have increased almost twice as much as they should have done as a result of recent food commodity price increases. Prices to consumers have increased far more than indicated by the small proportion of raw material cost in the total cost of processing and delivering. An analysis by UBS indicates price of food in UK shops increased by 6 per cent when in fact production costs increased by only 3.5 per cent, including the price of commodities, labour and currency exchange rate changes.

This information will not come as a surprise to anyone with knowledge of the activities of what is essentially an oligopolistic industry – both in its processing and retailing sectors. The most blatant example is the continuous rise in the price of a loaf of bread, always blamed on the rise in the price of wheat, when the cost of flour is less than 10 per cent of total production cost of a loaf.

What should be of more concern however is the undoubted fact while farmers’ prices fall as world markets recover from short term ‘food price crises’, the price of food in the shops very seldom falls. As one of the European Commission’s excellent Agricultural Policy Briefs graphically demonstrates: as commodity prices fall wholesale and retail profits rise as the supermarket till price remains at the crisis induced level.

“The distribution sector and the food industry have experienced growing value-added and profits, driven by growing volumes and prices, while the agricultural sector has been receiving a declining share of value added and struggled to maintain the farm income level,” the Brief points out. “There is a clear lack of transparency of prices along the food supply chain, which prevents market signals from reaching all economic agents active along the chain, and thereby prevents the market from functioning properly”.

The Commission poses several possible answers to the question why prices paid by consumers and paid to farmers do not signal the true state of supply and therefore of market conditions. The most important and obvious reason must be the lack of bargaining power – on both sides of the till. Consumers face a retail food market which in western Europe is between 70 and 80 per cent controlled by no more than 5 retail chains. At the same time, farmers and small scale processors and wholesalers, for the same reason, are price takers rather than price makers.
 http://ec.europa.eu/agriculture/analysis…

  The European Commission’s approach to yet another upcoming reform of the common agricultural policy is largely devoted to the continuation of the current policy with a few added concessions to green pressures on the side. This approach is increasingly irrelevant at this stage in the development of European agriculture and in an increasingly unstable world food system. It also has no relevance at all to the need to reduce taxpayer expenditure on farm subsidies.

In its November Communication on future development of the CAP the Commission set out three major objectives for policy: to improve food security; to protect the environment, combined with moderation of climate change, and to improve ‘territorial balance’. To meet these undoubtedly major challenges the Commission suggests a mish-mash of minor adjustments. What it does not do is to question fundamentally the present structure of the policy based firmly on handing out €45+ billions a year in direct subsidies to farmers.

What is certain is that none of the stated objectives of European agriculture policy are likely to be aided by continuation of the direct payment system. They are unlikely to make any significant contribution to increased food security, since by definition they are production neutral they will not stimulate extra production in Europe – even if that were a justifiable contribution to either domestic or global food security. As Professor Stefen Tangermann pointed out in his recent report to the European Parliament’s Agriculture Committee: “If more production in Europe’s agriculture is required to satisfy growing food demand, then rising market prices will signal that to farmers.” Since prices on world markets for food are expected to be significantly higher in the future than they were in the past, “There is no need to make direct payments or provide any other policy support in order to stimulate extra production in Europe, nor will decoupled payments be expected to have that effect”.

What was originally conceived as a short term transitional measure has become a permanent and expensive keystone of policy. Direct payments were originally introduced to compensate farmers for the perceived loss in income resulting from a radical reduction in European Union market support levels. In their original form they were production linked payment designed to compensate for an average 15% cut in intervention prices for cereals and other major commodities made to fit the rampantly inefficient CAP of the 1980s into the new policy parameters imposed by the GATT Uruguay Round (the Marrakech Treaty 1994).

Under further international and domestic political pressure against subsidised production, the subsidies metamorphosed into the ‘decoupled’ single farm payment. These were more comprehensive and wide ranging, but again designed in the Fischler reforms of the last decade, to compensate the entire farming industry for further dismantling of the previous interventionist price support policy. Their central position in the ‘new CAP’ was further consolidated by EU enlargement when they were extended to farmers in the twelve new member states. This was a matter of political expediency rather than economic rationality, since application of the CAP to these countries resulted in a rise in prices, not a reduction (the original reason for the payment of direct subsidies) .

As Professor Tangermann points out, the EU should now be considering abolition of direct subsidies and their replacement with policies targeted at specific environmental, social and economic problems focused on the most needy regions.

 Improved food security has long been a justification for protecting farmers. In the long history of European agriculture policy flinging up tariff walls and subsidising production has nearly always been the governmental response to the prospect of potential food shortage. The evidence that such actions generally result in a reduction of production outside the protected area and therefore a diminution of global food supply has seldom discouraged such policy responses.

Nonetheless, a majority of European Union governments appear determined to maintain, if not strengthen, the protection and maintain the subsidisation of European agriculture in response to the perceived ‘food crisis’. The need to encourage general economic and agricultural development in the least wealthy countries of the world is subjugated to this domestic objective. The general lack of any enthusiasm in Brussels for a constructive conclusion of the Doha Round is symptomatic of this attitude.

While lip service is paid to the need to make European agriculture ‘more competitive’, the protectionist majority are determined to see no reduction in the €40+ billion a year currently paid out of the EU budget to bolster the incomes of agricultural producers. Given the parameters of the current Doha negotiations, there would be no requirement to do so in any final agreement. What is needed is commitment to a significant liberalisation of agricultural trade; without this the Round is pointless.

The major areas of contention in the WTO negotiations for the EU are tariffs and export subsidies. These are also the major issues in any consideration of the Union’s future food security and also of global food security, as well as the EU’s commitment to fostering overseas development. There is thus a direct link between the planned further modification of the CAP and the Doha Round. While export subsidies are, fortunately, of diminishing importance, tariffs are at the centre of the food security argument. While the EU may achieve increased short term and inefficient domestic self-sufficiency behind a maintained tariff wall, long term security is only likely to be achieved by improving access to the whole of global food production. Increased European purchasing of agricultural commodities from third countries would stimulate production in these countries. Competition on world markets would be levelled by reduction in directly and indirectly subsidised EU exports. The net result would be an increase in total world food production with an obvious beneficial effect on overall world food security.

  The still relatively new UK Government believes that it can reform the CAP, settle the Doha Round and liberate the world’s agricultural markets. Subsidies will be phased out, import barriers and export restrictions removed and efficient farmers will face a brave new world of expanding markets and higher profits. ‘Oh, and while we are about it, we’re going to cut the European Union ‘s agricultural budget’. As if.

Like the courtiers of King Canute, successive British governments whether of left, right or centre, have committed themselves to turning back the tides of protectionism and farmer coddling which have dominated agricultural policy formulation in the European Economic Community, the European Community and the European Union for the last fifty years. And sooner rather than later they find themselves acquiescing in whatever messy compromise is cooked up to keep the CAP show on the road. The current Conservative led coalition, you can be sure, will be no exception.

The latest manifestation of this phenomenon came from the UK minister responsible for agriculture policy Caroline Spelman (and as a seasoned Brussels watcher in her former life, she should know better) addressing the National Farmers’ Union annual indaba: “The UK must get world leaders to open up markets, allowing you to export more, and freeing up world trade,” she said.

The UK’s “new” position, she said, was not to scrap all subsidies immediately, but to support “genuine and enduring reform that was evolutionary, helped farmers become more market-orientated, opened up markets to farmers and rewarded them for the environmental benefits they deliver” . While the latter objective is likely to be successful, because it dresses up more handouts to landowners in green camouflage, the former is highly unlikely. The current consensus, in Commission, Council and European Parliament is not for radical reform of the CAP, but for maintenance of the subsidy-based status quo after 2013 and beyond.

This approach will of course be extended to a Doha Round agreement (if any). Tarrif reductions will be limited and hedged around with conditions and the EU will maintain its right to subsidise exports and manipulate markets.

Spelman ended her peroration with the statement that: “There’s bound to be a smaller CAP budget,” Community spending on agriculture policy has increased almost every year since the first; it has gone up most during the years of so-called ‘reform’ since the mid-1990s.

Much fuss is currently being made in Austria and elsewhere of latest revelations on fraudulent exploitation of the Common Agricultural Policy. In “The Black Book of Agriculture – the intrigue of agricultural politics”, one Hans Weiss has opened the lid on fraud and misapplication of CAP subsidies in Austria. The book made headlines in Austria, found itself on the nightly news, and topped the best seller chart. As a long time observer and analyst of European agriculture policy, one is intrigued that anyone still finds this subject surprising or even interesting. Be assured Herr Weiss, a few farmers (and pseudo farmers) fiddling their EU subsidy applications in one small state among twenty seven is as nothing compared with the historical scale of the CAP racket.

In fact, it is probable that the scale of fraud and misapplication is far less now, since the CAP was largely converted from a market rigging to an income subsidy policy. In the heyday of CAP rackets – fifteen years or more before Austria joined the European Community, DG6 insiders assured anyone prepared to listen that probably a quarter or more of the then 30 billion ‘units of account’ (nominally about €25 billion in today’s money) was paid out on subsidy harvesting scams. The major racketeers in those days were not farmers, but traders and wide boys involved in shifting food commodities from one EC country to another and out of and into the EC.

Because of the market manipulating nature of the pre-Mac Sharry/Fischler agriculture policy, surpluses were large and politically embarrassing. They had to be disposed of, inevitably with large wads of taxpayer’s cash. This inevitably created fertile ground for fraud and for less illegal but equally immoral ‘manipulative trading’. Discussing this with an old Brussels colleague recently, we recalled scams which leave today’s minor fiddling in deep shade.

Just a few examples:

• Lorry loads of wheat and other grains passing and re-passing the same customs posts to collect monetary and accession (intra market adjustment) subsidies on each journey;
• Wheat being elevated out of one end of the hold of a freighter at Rotterdam and reloaded into the other in order to collect special EU export subsidies;
• Shiploads – millions of tonnes – of wheat, butter, beef and wine ‘sold’ to the Soviet Union under special DG6-sanctioned deals which actually meant that Moscow was paid by the EU taxpayer to take the stuff away;
• Manipulation of the Commission’s market monitoring system by international grain traders in order to minimise variable levies on imports and maximise EU subsidies on exports.

Note that all of these activities were of course not fraudulent; that they were in fact legal demonstates the basically corrupt and corrupting nature of the pre-reform CAP which cost taxpayers millions and lined the bank accounts of food traders . But probably the biggest source of loss through actual fraud was the manipulation of the official intervention buying system by false declaration of qualities, quantities and other criteria by traders selling to the official intervention system