April 16, 2010
To those unfamiliar with the arcane workings of the CAP it may seem strange that the French government supports its farm organisations in favouring the reduction of guaranteed income subsidies – even as a quid pro quo for greater market support and protection. Surely a substantial dab in the hand for doing nothing is worth more than dependency on the chances of the market? When however, the arithmetic behind these two policy options is examined in detail, for the large arable farms which form the backbone of French agriculture, it can be seen that if there is a choice the market protection option is much more attractive than cash handouts from the taxpayer.
This is because the larger the farm and the more skewed its production towards large scale field crop production, the smaller the proportion of income is likely to come from subsidies and the greater from the market price.
The reasoning behind President Sarkozy’s strategy of persuading farm ministers to trade subsidies for strengthened market support measures can be seen more clearly when it is applied at farm level. Were direct subsidies to be cut for example by 25 per cent in return for more market intervention support and more import protection, income benefit for the average French cereal grower would be substantial. Estimates based on current prices, costs and CAP direct subsidy payment levels on the basis of the current French average wheat yields shows a gross profit of €936 a hectare. Were a minimum price based around say, the average market price of the last five years to be maintained and the direct subsidy cut by 25 per cent, the gross profit would rise to over €1200/hectare.
Even if the direct subsidy were eliminated completely, but with this minimum price maintained , profit would still be marginally greater than the current price and subsidy combination. What is most politically significant about these calculations is that the guaranteed price plus reduced subsidy combination would result in a 30 per cent higher return than the profit from the current levels of market price and area payment. It is therefore unsurprising that it is pressure from the major farm unions which has influenced the Sarkozy view that swapping subsidies for market support in recent CAP reforms was a fatal mistake for the French farm industry.. Large French arable farms achieve the highest farm incomes in Europe, with a return on capital of 15 to 20 per cent compared with average of only 7 to 10 per cent in the rest of western Europe. Until the 2007-08 price hike however, the incomes of these farms were falling – more so than the incomes of livestock farms.
Now that world market prices have fallen back to more ‘normal’ levels, cereal growers are anxious that this trend should not be resumed. What French agribusiness really fears is the policy implications of the recent Commission’s Scenar 2020 II report which demonstrated that if all the market rigging mechanisms of the CAP were eliminated and replaced with a liberalised market, European overall food production would be almost unchanged. The fear is that politicians who are increasingly influenced by the urban majority on food policy development, will be more attracted to the idea of lower food prices for European consumers which would result from such a policy than continuing pointlessly shoring up farm prices and incomes. Such a policy the farm lobby can see all to clearly, would mean increased imports and greater competitive pressure on EU producers.