January 22, 2013
According to defenders of an unreformed European agriculture policy, current plans to harmonise and restrict EU farm income payments are likely to threaten viability of the agriculture industry and restrict output. Such an effect would, it is argued, pose a serious threat to the ability of the EU farm industry to improve both EU and global food security. It could be however that reform would have the opposite effect.
Historically, when famers’ incomes fall their immediate response is to increase production to compensate for the fall in revenue – what economic historians have labelled the aberration of the ‘backward sloping supply curve’. It is an aberration, of course, because it can only happen when there is surplus capacity in the industry: if producers are already at the point where their land, labour and other inputs are already operating at full stretch, no compensating increase in production is possible. This is probably the situation in the major crop producing areas of western Europe (original EU15). It is not however the case in the newer member states of central and eastern Europe.
This is certainly the major thesis of a recent report by agricultural experts at Rabobank. Their report argues that while EU 15 farmers are already operating at full capacity and if anything have been showing a tendency to ‘de-intensify’ , those in the EU12 are doing the opposite – largely in response to the stimulation of EU agriculture policy. The Rabobank report argues however, that cutting back income subsidies – as could happen as a result of CAP reform- will stimulate increases in output in the east of the Community. This is likely to result because of the large reserves of underutilised land and other resources left behind after the collapse of the command economies which once dominated the region. These countries have enormous potential to boost productivity and will prove to be the most dynamic in the next five to ten years as their farmers seek to increase yields “in order to counteract declining growth in direct payments and rising fixed costs”.
According to a recent report from the European Commission, this process has already been taking place. It says that there has been a decrease in the share of the Union’s farmed area (the so-called ‘utilised agricultural area’ (UAA)) managed by highly intensive farms in EU15and an increase in the UAA share managed by low input farms, with the opposite development in the ‘new’ member states.
If this process of intensification is stepped up in the NM12 the prospects for increased production in Europe is enormous. To take the major group of food crops, cereals, as an example, the current average yield gap between EU15 and EU12 is close to 40 per cent. In the major cereal growing regions of France, Germany and the UK the average wheat yield is over 8 tonnes a hectare; in the EU12 the average is less than 5 tonnes. The EU12 currently produces around 45 per cent of the total annual EU27 production of 140 million tonnes of wheat. If then the central and eastern Europeans catch up with the west – which they are quite capable of doing, given the innate fertility of their land – then EU27 wheat production could increase by around 25 million tonnes, or 18 per cent. There could be proportionate increases in other major food and feed crops such as maize, barley and rye. If the Rabobank analysis is correct, then this is as good an argument as any for cutting farm subsidies in a world where the demand for food is rapidly increasing.