Tuesday, July 31, 2007

Puzzle over co-decision

It is far from clear how agricultural issues will be dealt with under co-decision once the reform treaty is enacted. Under current rules, most CAP dossiers are decided under the 'consultation' procedure, where the Council must wait for an EP opinion, but has no obligation to incorporate EP amendments into the final text.

The reform treaty retains the text of the consitutional treaty which made a distinction between 'bigger' political issues, but consultation would remain for so-called 'technical' dossiers such as those 'relating to prices, customs duties, quotas and direct aids.' In practice, some of these could be very political. In any case, the distinction is a very fuzzy one and requires clarification if the system is to work.

The EP, although very attuned to issues like the environmental costs of pesticide use, has often not been a strong advocate of reform with its agriculture committee dominated by farm interests.

Monday, July 23, 2007

Glimmer of hope over Doha

International trade negotiations have been the most effective driver of CAP reform for over fiften years. I haven't commented on progress in the Doha Round for some time because prospects have looked so bleak since the collapse of the G-4 talks at Potsdam. But there does seem to be a glimmer of hope.

The Potsdam talks were ominously held at the Cecilienhof complex where the 1945 conference took place that carved up Europe after the end of the Second World War (I visited there when it was still in East Germany). This time it wasn't Stalin, Truman and Churchille/Attlee round the table, but the US, EU, India and Brazil: how the world has changed.

The talks broke up acrimoniously early after Brazilian Trade Minister Celso Amorin and his Indian counterpart Lamal Nath accused the US and EU of failing to live up to the commitment of a 'development round'. For their part the EU and US accused Brazil of inflexibility and even backtracking, particularly on tariffs for industrial goods.

On agriculture there were some signs of flexibility on the US side particularly in relation to trade distorting domestic support. There were also hints that the EU might be prepared to off bigger cuts for those products with tariffs over 90 per cent, although the EU insists that the discussion was more about the combination of tariff cuts and protection for so-called sensitive products.

Farm negotiations chair Crawford Falconer has tabled a draft document, but what it leaves open is the question of 'special product' provisions which permit developing countries to shield particular commodities from cuts in tariff agreements. They are a particular bugbear for the US who say they undercut liberalisation.

An agreement is not going to come anytime soon. Election pressures are increasing in the US and the next president may be elected on a protectionist platform, Hilary Clinton having seemingly abandoned her husband's commitment to free trade.

Friday, July 20, 2007

The dairy paradox

British dairy farmers are leaving the industry in large numbers, but world milk and milk product prices are heading upwards fast. How can one explain this paradox? The simple answer is, of course, that the key UK liquid milk market is largely insulated from world market factors.

Wholesale milk has doubled in price on world markets over the last year. One factor is the surging demand for milk products in China and the Middle East as diets change in respond to surging incomes. Drought problems in Australia which crippled the country's dairy output has raised the wholesale price of skimmed milk powder by 60 per cent over six months. This is an input widely used by the food processing industty and over year it has increased in price from $2,000 per tonne to $4,800.

The latest Milk Development Council survey shows that 16 per cent of dairy producers, some 3,000 in total, intend to quit. Of course, some of those may have been departures anyway given the lack of successors. It is also worth noting that they tend to be smaller producers, as the loss of 16 per cent of producers is assumed to produce a 7 per cent fall in output (although this in part depends how far larger producers increase output).

Campaigners for dairy farmers often state that many of them are not making a profit. These statements need to be treated with a little caution as generally accounts include family labour as a cost before profits are calculated. Nevertheless, the sector has been under pressure.

The decision by Tesco to pay 22p a litre for retail milk sets something of an industry standard and is a lifeline for producers. Views differ about whether it was the result of the Competition Commission's increasingly vigorous interest in Tesco or the outcome of campaigning by dairy farmers through the NFU and other bodies. However, milk used for other products like cheese and butter generally yields a poorer return.

Some of this is feeding through into consumer prices. The home delivered pint at 48p per litre is likely to go up by a penny at most, but within the past year, the supermarket price of a pint of double cream has gone up from 91p to £1.12p, an increase of almost a quarter. Processed foods and cheese are likely to see a substantial impact, while Domino's Pizza is forecasting a 30 per cent rise in the cost of its products due to cheese price increases. Chocolate manufacturers have also taken a hit, although that has often been felt more in terms of a profits squeeze than by consumers.

Export refunds for dairy products have now been phased out which is a significant gain given they were at a level of €3.01bn in 1988 and even amounted to €725m last year. They could be reinstated if the market falls, but it is currently so buoyant that the Commission is talking of reducing the meetings of the Dairy Management Committee from twice to once a month. If export refunds remain at zero, EU spending in the dairy sector would be lower than revenue from superlevy, making the sector self-financing.

The Commission is determined to phase out dairy quotas by 2015, although discussion of how to achieve a 'soft landing' continues. There have been expressions of concern from economically marginal but politically influential dairy areas like Bavaria. One solution could be to use a 'national envelope' device to provide assistance.

The EU has historically had a structural surplus of milk, while Britain has not been self-sufficient because of its historical reliance on imported dairy products from the Commonwealth. A more market oriented system should benefit larger scale UK producers, who are among the most efficient in Europe, but pressure on smaller, more marginal and more peripheral farms would continue.

Horse paddocks get SFP

In the long run it is going to be difficult to justify a Single Farm Payment (SFP) model that is based on historical receipts. This model originated in the generous compensation given to cereal farmers for cuts in intervention payments in the 1992 MacSharry reforms. There will be a shift to a regional model with a flat rate payment per hectare in each region. This is already under way in England, Finland and Germany and all the new member states have a flat rate payment system.

However, those member states that have introduced a regional model have seen applications for CAP support rocket, e.g., on horse paddocks which are a popular use of land near any centre of population. These claims are frequently for small amounts, e.g., €50 - €100, but the high number of applications - 40,000 in England and 20,000 in Denmark - imposes considerable transaction costs.

It is likely that the Health Check will look at introducing some form of lower threshold for SFP funding, such as a minimum amount or raising the current 0.3 ha minimum area requirement for applications.

Thursday, July 19, 2007

Corridor politics secure fruit and veg deal

The fruit and vegetable reform agreement is another step on the road to a more market oriented CAP. Yet in some ways it is more significant in terms of how it was secured and what it reveals about decision-making in an EU with 27 member states.

Despite fears of a marthon session, agreement was reached by 5 p.m. in the afternoon. This was done by conversations in the corridor rather than in plenary session of the Council. This reflects the way in which deals are increasingly being reached in the Special Committee on Agriculture or in the margins of the Council itself - over lunch or in the corridor. This has always happened to some extent, but it is more necessary in a much enlarged EU.

The existing system of processing aids for tomatoes (€329m), citrus fruit (€241m) and peaches/pears/prunes/figs (€76m) based on production and an area based scheme for dried grapes (€115m) will cease this year. The funds received by each member state will be added to the national envelope for the SFP. However, a 'coupled' aid for tomatoes can be retained by member states for four years.

Various side payments had to be made to secure the deal. Spain and Italy will get a one-off national aid of €15m in 2007/8 to help the tomato processing sector. The reference period for Greece was adjusted because of a poor peach crop in 2004, effectively giving Greece an extra €3.1m in its envelope. There will be some transitional direct payments for soft fruit on new member states, although in the case of Latvia this amounts to just €92,000. But by such adjustments deals are made.

Monday, July 16, 2007

Productionists unite under food security banner

A number of producer interests would like to revive food security as a major driver of agricultural policy. Organisations like the Commercial Farmers Group (CFG) in the UK, a small grouping of leading producers, argue that new threats are present in the form of population growth, pandemic diseases, climate change, terrorist actions and increased demand for renewable fuels. They want to change the balance between the environmental and food safety concerns that have been driving agricultural policy in recent years and return to more traditional productionist priorities.

Hence, the NFU in England argues that ‘Food security concerns … need to play a role in the design of any future agricultural policy. Similarly, the Country Land and Business Association (CLA) argue ‘that security of food supplies should be a strategic priority.' The CLA’s chief economist, Alan Buckwell, has been trailing the idea of a European Food and Environment Security Policy which would seek the ‘socially optimal’ production of high quality food, energy, biodiversity and landscape. This is undoubtedly an ingenious way of placing old ideas in a new wrapper.

The CFG takes the view that ‘80% of the food consumed nationally should be from the UK’. This revival of old style economic planning targets is too much for the NFU who stressed, in line with government thinking, ‘that food security was not the same as self-sufficiency and the union did not want to see the government set strict targets on food production or intervene in the market.’

What the NFU envisages is an ‘early warning system’ in which indicators such as the UK’s share of EU production in different sectors would be used. When that fell by a given amount, there would be an investigation by a joint industry/government panel. This would then presumably undertake measures to ‘safeguard the productive capacity of UK farming', although how this would be compatible with EU state aids policy or WTO rules remains unexplained.

Farmers' Weekly columist David Richardson, an unabashed defender of productionist values, has argued that the early warning committee should be set up as an equivalent of the Bank of England Monetary Committee. Of course, one difference is that the experts on the Bank of England do not have a substantial direct personal interest in the decisions made as farmers and their allies would.

Productionist lobbyists have tried to borrow discourses about energy security, claiming that if government can pay attention to energy security it can also move food security up the political agenda. However, oil and gas supplies are more reliant on a small number of potentially unstable countries than food supplies. This argument also overlooks the increasing global integration of food production. Nevertheless, the food security discourse is a powerful one and there are those who consider that it could be used as a basis for a productionist turn in policy.

Saturday, July 07, 2007

Boom in Borage?

Walking the fields near my home, I noticed a new blue starflower crop that I was not familiar with. Indeed, the crop has suddenly become one of choice throughout this part of Warwickshire.

A little research established that it was Borage, a high value, speciality oil crop. Similar to Evening Primrose, Borage is recognised as a key source of gamme-linoclenic acid (GLA) and is used, when marketed as Starflower Oil, as a health food supplement or in skin care creams. GLA is known to have anti-inflammatory properties, without causing side-effevts often encountered by other inflammatory drugs.

Borage was first grown as a field crop in the UK in 1983, mainly in East Anglia. During the 1990s the crop area increased significantly. It has agronomy advantages as it is a good break crop in arable rotations. It's a low input crop with minimal environmental impact, not normally needing pesticides and requiring low inputs of nitrogen.

Under the single farm payment regime, farmers can be more ambitious about growing different crops as they do not need to sell into intervention to obtain subsidy payments. The contract price for borage is currently around £2,000 per tonne and ex farm gross margins of £630 per hectare are achievable. A number of companies in the UK offer 'buy back' contracts and agronomy support.

If grown specifically for the pharmaceutical industry, Borage can be grown on set aside land, but as the majority is grown as a food supplement this is not generally possible. However, set aside looks like it is on its way out with the increasing amount of land devoted to biofuels.

The spread of Borage into Warwickshire suggests that to an extent the policy instruments of the new look CAP are working. Of course, it also means less land devoted to conventional food crops, pushing up their price. But, in principle, it should mean that farmers get better returns from the market and have less need of subsidy.