Select Committee on Environment, Food and Rural Affairs Appendices to the Minutes of Evidence


Memorandum submitted by Professor Wyn Grant, Warwick University (A40)

  This paper is limited to some key points on CAP reform for consideration by the Environment, Food and Rural Affairs committee of the House of Commons.


  Commissioner Fischler has been seeking to dampen down expectations of what will emerge from this process for some time. The French Government in particular has also made it clear that it does not expect anything emerging from the process beyond what it calls "adjustments". This might mean, for example, a widely signalled change to the rye intervention regime; some attempt to reform the sugar regime; further measures on beef. In other words, the focus would be on the commodity regimes perceived to be in the greatest difficulty. The dairy sector would be largely left alone. The most comprehensive measure that is likely to be agreed on is some form of "modulation", most probably the "Robin Hood" version which would involve some capping of CAP payments to larger farmers with the funds released being diverted to "second pillar" or rural development measures.

  A more radical reform would involve some element of "degressivity", ie, a regular annual reduction in the real value of payments made under the CAP. It would also require substantial reform of the dairy sector where there continues to be structural overcapacity and where the characteristics of the current regime are undermining the competitiveness of EU dairy exports in the world market. A recent Court of Auditors report argued that the subsidy element in milk producers' income has been increasing and the producer subsidy equivalent for the sector in the EU is estimated at 54 per cent. However, any significant reform of this regime is unlikely before 2006. A substantial reform would involve the phasing out of the current quota system and an effective lowering of farm gate prices for dairy products (possibly of the order of 25-30 per cent). This would have serious implications for smaller scale dairy farmers who would require some form of compensation.

  A "second-best" reform would be to permit transfer of quotas between member states that would potentially be of benefit to larger scale British dairy farmers wishing to expand. The Commission has always resisted this on the grounds that it would undermine the basic rules of the quota system. However, if there is an internal market, should there not be quota transferability?


  This provides a further impetus for reform. This will intensify as the end of 2003 approaches when the "peace clause", which effectively prevents challenges to the CAP at the WTO, expires. The Commission's strategy is evidently to make further concessions on export subsidies, but to defend the "blue-box" which permits area aids to cereal producers (and would also shelter similar compensatory payments to the dairy sector in the future). The Commission likes to claim that the measures used in the CAP today are less trade distorting than the policy instruments used in the past. It is true that they are less directly trade distorting, but substantial payments to producers, even if partially decoupled from production, are still likely to encourage them to produce more than they would do in the absence of the payments.


  It is important to note that there are two general versions of the reform agenda currently in circulation:

    —  One, often advocated by the United Kingdom, with varying support from Denmark, Sweden and the Netherlands, seeks to make agriculture more market orientated and internationally competitive. It is argued that the industry would actually benefit in the longer run by becoming less subsidy dependent and more responsive to market signals from consumers. In broad terms, this might be called the "liberal" approach.

    —  A different agenda is advocated by the "greens", notably the German agriculture minister, Frau Künast. This approach advocates less intensive forms of agriculture, the substantial development of organic agriculture and more localised servicing of markets. The welfare of farm animals is an important part of this agenda. It is not particularly interested in questions of international competitiveness, either of farming or the food processing industry.

  Where these agendas might converge is in an acceptance that there will have to be a shift away from an agricultural policy to a rural policy that takes a multi-dimensional approach to the problems of rural areas.


  The Consumers' Association has recently produced a paper advocating the abolition of the CAP and of the specialist EU institutions concerned with it such as the Agriculture DG, the Council of Agriculture Ministers and the Special Agriculture Committee. It criticises the UK Government for advocating reform rather than abolition. Any UK Government advocating abolition would not be seen as credible and would risk alienating other member states whose support might be required on other issues where British interests were at stake.

  The Consumers' Association makes an interesting comparison between the cost of a similar basket of food in the UK and New Zealand. New Zealand has particularly favourable conditions for certain types of agriculture and it is not surprising that some products cost less locally. What this type of comparison fails to take into account is that if the CAP was to be abolished, many European farmers would go out of business. The world balance of supply and demand would be significantly affected and prices of imports into the EU would increase. This would not readily bring farms back into production as land would have been abandoned, capital equipment dispersed and farmers would have found other forms of employment. Of course, the CAP does generally have an adverse effect on the prices paid by consumers, but its magnitude is often exaggerated.

  Some of the arguments put forward for continuing agricultural subsidies are of little merit. Food security arguments are not particularly relevant in modern conditions or should at least be viewed on a Europe wide basis. It is true that because of such factors as the impact of the weather, agricultural products are subject to gluts and shortages and it is difficult to arrive at a stable equilibrium between supply and demand (this is really the basis of the separate sub-discipline of agricultural economics). However, that problem could in principle be dealt with by insurance or, should that not be feasible, by some kind of stabilisation fund that would not require the current scale of intervention. It has proved possible for the potato market to function without a commodity regime. Much of the money spent on the CAP in any case does not reach the farmer but is absorbed by various intermediaries, including bureaucracies. Because of the complexity of the CAP, transaction costs are high.

  However, we do not start with a blank sheet of paper. The way that policy has developed means that the industry has become significantly dependent on subsidy. Decisions taken in Brussels directly impact on planting decisions taken by farmers. Too sudden or rapid a removal of subsidies would throw an already weakened industry into chaos.


  There has to be a recognition in the industry (and there is in some quarters) that just because someone's parent has been a farmer, they cannot be expected to be given state help to follow in his (or her) footsteps. Leaving aside the issue of diversification, which is neither possible nor desirable for all farmers, and is probably approaching saturation point in some areas, there are two broad models for successful farming:

    —  A high volume approach which seeks to spread fixed costs over a large number of units of production and keeps variable costs under strict control, monitoring inputs carefully in terms of cost effectiveness. A large dairy farm would be a good example.

    —  A more quality oriented, niche marketing approach, perhaps involving cooperation with other farmers, processors or retailers to market high value added products. An example that comes to mind is a farm I visited in Herefordshire that is producing sheep's milk. Some of it is frozen and sold direct to consumers (allergy sufferers) at a premium price. Some of it is used to produce high quality (low fat content) ice cream and manufactured and sold in a retail outlet in a town visited by tourists.

  There is much to be said for replacing existing subsidies, at least in part, by a "farm bond" as advocated by Professor Swinbank and his team at Reading. This could be used in a number of ways:

    —  To generate an income for the farmer to compensate for the loss of subsidies.

    —  For further capital investment in existing activities to make them more competitive.

    —  To develop new activities.

  Simply going as we have been will not help farmers or farming in the long run. We need new approaches that are, however, sensitive to the concerns of the rural community.

18 December 2001

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