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09.10.2010 General posts
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Options for getting rid of the Single Farm Payment

Berkeley Hill, Professor Emeritus of Policy Analysis at the University of London, discusses four exit strategies: simple expiration of the SFP in 2013, replacement by a transitory income support scheme, additional rural development measures to promote restructuring, and a bond scheme.

Since 2005 the Single Payment System (SPS) and its Single Farm/Area Payment (SFP) has been the major way in which support is given to EU farming. Its roots go back to the direct payments introduced after the 1992 MacSharry reforms to compensate for the lowering of commodity support prices, and over time this compensation has been transformed into the Single Payment System we have today. It forms an undeniably important contribution to the revenues received by farmers. For example, in the UK Defra accounts show that in 2008 SFPs made up over four-fifths of the total value of subsidies to UK farming (£3.7 bn in 2008, up from £2.8 bn in 1996), and at farm level the SFP in 2008/9 was equivalent to just under half the average Farm Business Income (£23 thousand of the £51 thousand average FBI in England).

However, as compensation for a policy change that took place nearly two decades ago, its rationale has well passed its sell-by date. Tax-payers seem to be getting very little in return for what is, in effect, an income subsidy. It is very hard to justify either in terms of market failure or equity. The European Commission is equivocal about what will happen when the next CAP reform takes place in 2013. While a recent (Dec. 2009) discussion paper on the CAP mentions the need to provide a safety net for farmers against volatile market conditions and to prevent land abandonment, it seems clear that the SFP will not survive in anything like its present form. In the latest (leaked) communication The CAP towards 2020 (29 September 2010) one option discussed by the Commission is the abolition of such income support, something that many commentators would welcome but the agricultural industry would be expected to have strong views about.

If abolition of the Single Payment is a desirable aim, how should this be done in ways that would be workable in each of the EU’s 27 Member States? The first option is to simply cancel the SFP when the present financial perspective runs out in four years time (the end of 2013). From a policymaker’s viewpoint, any sudden removal is not attractive, as this could give rise to claims for compensation, both from farm operators and from landowners. They will have made investment decisions on the reasonable expectation that the long-standing support given to agricultural incomes would continue, often reinforced by national and EU assurances. But the OECD has found that farmers are often very capable of adapting to such changes, and that this ability is often under-estimated by policymakers. A period of notice of over three years may be enough. The implications for national income of the adjustments made by agriculture are likely to be negligible, though there would need to be appropriate safeguards against environmental damage and with welfare payments where national general social security schemes are not satisfactory. It is recognised that such an option might not be politically acceptable, at least in some Member States.

A second option is to consider temporary, fully decoupled income payments from 2014. Though serving much the same function as SPS (assuming these were to be terminated), there could be presentational and practical advantages. Such payments could be clearly labelled as short-term and could be tapered over time, features that could reduce the danger of over- (or under-) compensation when making ex ante estimates of compensation. Furthermore, they could include elements that recognised the equity aspects and welfare needs so that, for example, higher payments could be given to relatively recent entrants, in areas where there were social reasons for cushioning income (such as maybe a longer phase-out period in LFAs), and to cases where resulting poverty is clearly demonstrable (and where this is not adequately met by general social safety net provisions).

Payments might conceptually be used to provide a safety net for incomes from farming, so that only farmers whose income falls short of certain benchmarks based on their past income are entitled. This has been considered twice by the Commission but ruled out on each occasion largely on grounds of impracticality, particularly the lack of farm-level data by which it could be operated. This potential instrument has been aired once again by the Commission in its 2010 paper, though perhaps only as something that can be knocked down once more in the political bargaining. However, temporary cushioning arrangements, if decoupled and not significantly affecting competiveness, might include elements of national funding which would increase the flexibility offered to Member States that attach particular national importance to the contribution their farm families are perceived make to rural society.

A third option is to accompany the dismantling of the SPS with assistance to structural change and rural development. Many such schemes are already in place as part of Rural Development Programmes, so an expansion is implied. Grants for general education, management training and skills acquisition, provision of professional advice, investment in diversification on and off the farm, processing and marketing, and for exit are covered by EU Regulations due to expire in 2013 but likely to be continued in subsequent legislation. Indeed, each of three broad policy options set out by the Commission in its 2010 paper give a continuing or modified role to rural development spending. EU rural development policy is often criticised as being agri-centric, but its farm adjustment elements may be of particular value in the context of dismantling the SPS. Issues include how the thickening of the CAP’s Pillar II should be financed, the ability of the delivery system to cope with expanded schemes (and possibly additional ones), and the capacity of the agricultural sector to absorb more resources. At national level there may be issues of land mobility and taxation to address if adjustment by farmers and landowners is to proceed unimpaired (Blandford and Hill 2006).

Related to the above, it would be possible to expand agri-environment payments, not only for purposes already in place but also to assist overtly with achieving objectives relating to climate change, renewable energy etc.. Thus agriculture could be seen to be providing a service in exchange for receiving payments, a feature that might be attractive politically to multiple stakeholders (beneficiaries, taxpayers, politicians and administrators).

Fourthly, there is the option of buying out future SFP entitlement, something not covered in the Commission’s The CAP towards 2020 but worthy of consideration. This essentially capitalises the value of payment entitlements, in a way similar to the buy-outs of peanut and tobacco quota used in the US to remove these forms of market regulation. Income bonds as transitional mechanisms have been the subject of long-running discussion in the EU and came within the realm of CAP policy possibilities as long ago as the 1991 MacSharry proposals. Given that SFPs are likely to continue from 2014 in some form, at the outset it may be advisable to offer farmers the flexibility of either an income stream (for a limited period and maybe on a diminishing basis) or a lump sum at the start. For many on unviable farms, a lump sum will enable them to invest profitably outside agriculture and to exit from farming, and demonstrable success may win over others to accept them. Assuming that post-2014 entitlements will be smaller than current ones, it may be preferable from the taxpayer’s viewpoint to wait until then to buy out the system.
A policy tool stands more chance of success if it is acceptable to its target group. Contrary to assumptions by some commentators, a large-scale survey (reported in Swinbank and Tranter 2004) found that in Portugal 69% would be very or quite comfortable at the thought of a proposed bond scheme, with somewhat lower shares in the UK (45%) and Germany (35%). Figures are likely to be higher now that the (almost decoupled) SFP has become a familiar form of support and as the prospects of its termination increase.

Finally, it is recognised that what appears to be a first-best solution to the dismantling of the SPS (announcing that it is being terminated in 2013) may not be politically realistic. Consequently, some of the other options may have to be used (such as investment in human capital, higher environmental payments, and lump-sums). Each of these carries positive connotations and can help shift agriculture to a more competitive and sustainable role. From a strategic standpoint it may be helpful to stress these attributes.

References and further reading

Blandford, D. and Hill, B. (2006a), “Adjustment Policy for Agriculture in Developed Countries” Chapter 17 (pp255-70) in: Policy Reform & Adjustment in the Agricultural Sectors of Developed Countries, eds Blandford, D. and Hill, B., CAB International, Wallingford. ISBN 1-84593-033-9.

Commission of the European Communities (2008). Impact Assessment [of various Regulations and a Decision]. COM(2008) 306 final. Annex D.

Commission of the European Communities (2009) Why do we need a Common Agricultural Policy? Discussion Paper by DG Agriculture and Rural Development, December 2009.

Commission of the European Communities (2010) The CAP towards 2020: meeting the food, natural resource and territorial challenges of the future. Communication from the Commission to the Council, the European Parliament, the Euroepan Economic and Social Committee and the Committee of the Regions. Brussels, 29/09/2010 COM(2010)

Swinbank, A. and Tranter, R. (eds)(2004) A Bond Scheme for Common Agricultural Policy Reform. CAB International, Wallingford, Oxfordshire. ISBN 0-85199-744-9.