Friday, November 21, 2008

CAP Health Check deal

An outline of the compromise deal brokered by the French presidency to complete the CAP health check can be found here: Euractiv . There is also extensive coverage on the CAP Health Check blog that we work with: see Health Check. Even if the name of the blog eventually changes, the need for its campaigning stance remains.

Further progress has been made in the direction of strengthening Pillar 2 payments which emphasise environmental protection. Indeed, this move has upset the NFU: NFU . However, this is not a fundamental reform of the CAP, but nor was it meant to be. For that we will have to wait at least until 2013.

In any case with economic crisis hitting Europe the attentions of its leaders is focused elsewhere. Industrial policy is making a comeback, particularly in France and Italy. In so far as payments to bail out firms in difficulty become fashionable once again, aid to farmers looks less exceptional and less open to criticism. A quote from Silvio Berlusconi about says it all: 'State aid, which until yesterday was considered a sin, is now absolutely essential.' So much for the internal market.

Industrial policy was, of course, as big a disaster as farm policy: it just didn't last as long. The least efficient firms went out of business eventually and those that were left were able to compete in normal economic conditions.

We will provide more analysis over the coming weeks.

Monday, November 17, 2008

The methane menace and hamburgers

A paper on the contribution to climate change of livestock methane emissions has found that the problem is likely to get worse as global demand for meat and dairy products increases. Dr Andy Thorpe, an economist at Portsmouth University, found that a single herd of 200 cows can produce annual emissions of methane roughly equivalent in energy terms to driving a family car 180,000 km.

Whereas carbon dioxide emissions have increased 31 per cent over the past 250 years, methane, which has a higher warming potential and a longer atmosphere lifetime than carbon dioxide has increased by 149 per cent over that time. Dr Thorpe commented that 'Methane emission growth ... has been increasing exponentially in the developing world due to a rise in incomes leading to an increased demand for meat and the "hamburger connection" where developing countries make a lucrative profit supplying meat to developed countries.'

Attempts to curb animal methane emissions have included feeding grazing animals on cottonseed and alfalfa, using food additives, and vacinnating animals with drugs, but it is not clear if they will work on a large scale. A reduction in the amount of livestock kept for meat and milk would only put pressure on other food sources, such as cereals.

Animal methane emissions from developing countries have increased to 75 per cent of the global total, with India and Brazil in the lead. It is thought that atmospheric methane is responsible for one-fifth of the global warming since 1750.

Cows, sheep, goats and camels have an additional stomach and produce large amounts of methane as they digest their food. A dairy cow in New Zealand will typically produce around 80kg of methane a year, just through burping.

The policy pressures this produces is shown by complaints from the Irish Dairy Industries Association that the Republic's commitment to reduce greenhouse gas emissions is piling further economic pressure on the country's beleaguered dairy industry. It was argued that because Ireland's greenhouse gas emissions (GHG)were closely linked to methane from cattle, a 20 per cent cut in GHG emissions would result in a 20 per cent cut in Ireland's dairy herd.

The association complained that there is no international standard for measurement of emissions from enetric fermentation in cattle. The background to these concerns is a sharp drop in prices from 40 cents a litre in 2007 to around 24 now.

Vegetarians would no doubt argue that the GHG emissions of cattle reinforce the case for not eating meat. In practice, it is difficult to see how the problem can be tackled given that the livestock sector is under heavy economic pressure.

Wednesday, November 12, 2008

Auditors' report makes for sobering reading

The very complexity of the CAP opens it to scams of various kinds. These may not be fraudulent in the criminal sense of the term (although such instances have occurred) but they do represent a use of loopholes to divert public money to line the pockets of individuals.

In this respect the report from the EU Court of Auditors for 2007 makes for sobering reading. The EU spent 51 billion euros in 2007 on agriculture and natural resources of which all but 2 per cent was on agriculture and rural development. The Court's press release states, 'the estimated overall error rate is still material. [Translated out of bureaucratic code, a lot of public money is being wasted]. Rural development, with its often complex rules, accounts for a disproportionately large part of this error rate.'

Of 196 transactions examined, 61 were affected by error and some two-thirds of the errors (40) were classified as 'serious'. In its response, the Commission finds reassurance in the fact 'that the most likely overall error rate is not significantly different from last year's'. So that's all right then.

Once again olive oil in Southern Europe is a particular culprit. In its 2006 report, the Court pointed out that in Greece, Spain and Italy the olive cultivation data were neither complete not reliable. 'These weaknesses persist in Italy and Greece, where four out of five transactions audited contained errors, some of which led to significant overpayments.'

Significant overpayments were found in relation to nuts and dried grapes in Spain and Greece. In one case in Spain a farmer appeared to have far fewer sheep than the number that had been claimed for.

Northern European states were far from blameless. In relation to the Single Payments Scheme which now accounts for 55 per cent of all payments, 'in England the four entitlements audited were erroneously calculated mainly due to failure to take account of changes in land parcels; while these errors did not have a significant impact on the 2007 payments since England applies the "dynamic" model, these initial entitlements, unless corrected, will result in significant over/underpayments in future years.'

In England the same parcel of land can be claimed by two 'farmers' under different area related and EU schemes. In nine out of 12 on-the-spot visits to 'new beneficiaries' of EU direct aid, 'the area declared for SPS was not eligible in whole or in part either because it was not in good agricultural condition, its main use was not agricultural or the beneficiary was not eligible because he did not carry out any agricultural activity on the land.' [This is sometimes referred to as 'sofa farming']

More generally, the Court states that 'the administrative controls in England do not provide assurance that EU aid is paid out correctly. England [does] not avail of the option to use aerial or spatial orthoimagery'. As the Commission points out in its response, this is not legally required, but it is still good practice.

Portugal has paid out €3.5m on 'balido' land. This land is usually public land of very poor pasture and mainly covered by bushes and trees. In Greece quantities of rice were missing from public storage.

In nine out of 13 agri-environmental schemes audited in France and Ireland farmers had not met the eligibility conditions. Even the Commission admitted that many of these errors had 'an important financial impact' in relation to records about nitrate reduction. The Commission also conceded that it was following up with French authorities the lack of an adequate audit trail in relation to interest rate subsidies.

One is left with the impression that public funds will contunue to be misallocated or wasted.

Sunday, November 09, 2008

Farmers and the credit crunch

Over ten years ago I was involved in an international project on farm finance as part of which I interviewed the agricultural finance specialists in all the banks in Britain and Ireland. One thing that came across was that banks competed to lend to farmers because it was seen as a lucrative market with very secure assets.

Figures from the Bank of England show that agricultural borrowing in the UK is at an all time high, £11bn at the end of September, compared with £9.94bn at the end of 1997. The debt burden was, however, offset by an increase in farm incomes. According to Defra, the average income was about £48,000 in 2007-8, about 40 per cent higher than the previous year, owing largely to higher prices for cereals and milk.

The falling exchange rate may also benefit farmers, given that subsidies are denominated in euros (the notorious 'green pound' which was one of the most complex aspects of the CAP is no longer with us). The estimated €3.8bn (£3.1bn) in subsidies this year should be worth more. Sterling's weakness may make exports more attractive. In 2006, the last year for which figures are available, the UK exported £10.5bn of farm products.

Agricultural land is still fetching historically high prices, giving farmers an equity cushion. Borrowing is much lower than in other sectors. The total value of farming assets in the UK is estimated at around £150bn, giving a gearing ratio of less than 10 per cent, far less than the rates other industries have come to see as normal.