CAP Reform – A matter of the past?
By Stefan Tangermann, retired OECD director for trade and agriculture and Professor Emeritus, University of Göttingen. He expresses his disappointment with the Commission communication on the post-2013 CAP and thinks about what the Commission could have proposed instead.
Over the past 20 years or so the CAP was a sequence of determined and successful reforms, pushed forward by courageous Commissioners for agriculture, welcomed by Europe's citizens and acknowledged internationally.
The Commission's new Communication on the CAP post-2013, issued last week, marks a deplorable departure from that record. In its core it is an attempt at constructing political justifications for maintaining as much as possible from current subsidy benefits for Europe's farmers. Where has all the courage and vision gone that animated the Commission's CAP reform drive in the past?
Past reforms successful
The CAP had become an overly protectionist policy in the 1970s and 1980s, resulting in excessive surplus production, unbearable budget expenditure and international trade tensions. Europe’s citizens did not understand why they should pay twice, as consumers and taxpayers, for the accumulation of butter mountains and wine lakes, and began to notice that this policy also resulted in environmental damage as high support prices induced farmers to intensify production.
In 1992, Ray MacSharry was the first to initiate fundamental reform, for the benefit of Europe but also to open the gate to a successful conclusion of the Uruguay Round of GATT negotiations. His reform reduced the level of price support, with direct payments as compensation. Franz Fischler pushed reform further in several dimensions. Most importantly, he decoupled direct payments from production in order to reduce incentives to overproduce. Mariann Fischer Boel added a further dose of CAP reform by expanding the domain of decoupling, putting the dairy market policy on a firm path towards the end of quotas, reforming the outdated sugar policy and moving some money from direct payments to rural development.
The CAP that emerged from these determined reform efforts has greatly improved market orientation of Europe’s agriculture. The last three Commissioners for agriculture have, therefore, laid down the framework for allowing the EU to respond constructively to the crucial challenge faced by its agriculture industry in the 21st century, i.e. to become a competitive player in global agriculture, while domestically realising the sustainability paradigm.
A disappointing Communication
Against that background, the Commission’s recent Communication is a disappointment. Implicitly, its focus is on the future of direct payments. That is quite right. In purely budgetary terms, the direct payments have become the most important element of the CAP, consuming around three quarters of the EU’s agricultural expenditure and nearly one third of the Union’s overall budget. When the payments were first introduced in the CAP they had an entirely respectable purpose, namely to compensate farmers for the sudden cut in support prices. The flip side of that coin is that the justification of compensation fades over time. Payments originally introduced in 1992 can hardly be said, twenty or thirty years down the road, to still be necessary to allow farmers time to adjust to the reformed policy framework.
The Commission is obviously fully aware of this problem, and its communication comes across as a desperate endeavour to cleanse the current direct payments regime from its most controversial features and to construct a new justification that, it is hoped, could create the political base for maintaining as much as possible of the payments as a permanent feature of the CAP.
The cleansing part of the job deals primarily with the equity concerns so frequently raised by critics of the current regime. A more equal distribution across member countries is proposed to calm down farmers and agricultural policy makers in the new member countries. Capping payments might pacify those who criticise the large sums flowing to some rich recipients. One wonders whether the implications for land markets have been well considered. Farm land will become more expensive in the countries where payments are raised, making life more difficult for dynamic farmers who want to expand. Capping means that larger farms will find it more difficult to compete for land. This is not exactly a recipe for enhancing competitiveness of Europe’s agriculture.
Direct payments for food security?
The justification endeavour of the Communication focuses on objectives which can supposedly be attained only with a continuation of direct payments. Food security, in Europe and globally, is one of them. In times of volatile international commodity markets and sudden price explosions for food this might appear to make perfect sense. However, it is not as if Europe is not producing enough food to save its citizens from starvation, nor would we have to fear such consequences if the direct payments were abandoned. And it is not necessary or sensible for the CAP to persuade Europe’s farmers to produce enough food for the rest of the world.
When the market demands more food, then prices will signal that clearly to the farming community. And Europe’s farmers have shown how well they can respond to rising prices, when they produced butter mountains and wine lakes in the 1970s and 1980s. There is no need for the CAP to tell farmers they should produce more.
To help farmers cope with larger market volatility may well be worthy of (limited) government assistance. But this can be achieved much more effectively, and at a significantly lower cost, through well-designed insurance schemes, which the Commission suggests should come on top of continued direct payments.
Another attempt at justification is the argument that farming will be abandoned in significant areas if support is withdrawn. Irrespective of the empirical accuracy of this argument, simple logic suggests that it is not necessary to make direct payments to everyone within EU agriculture in order to keep specific regional areas from falling idle. It would make much more sense to (i) identify where in the union there is a threat of area no longer being farmed in the absence of payments, (ii) determine where in these areas there is a need or desire to maintain farming, and on that base (iii) make specific payments to these areas, conditional on farming activities of the nature desired.
Such payments figure, in the Commission’s communication, as a possible third element of direct payments which would complement the current less-favoured area payments. Such payments can certainly be used to avoid land abandonment – there is no need to maintain a comprehensive regime of direct payments to deal with that specific issue. And even less valid is the Commission’s argument that continuation of support is required in order to avoid intensification of agricultural production in the more competitive areas of Europe. The argument that less support leads to more intensive production is against all economic logic.
Income support cannot justify direct payments
The most important argument for continued direct payments, both explicit and implicit in the Communication, is farm income support. The Commission makes the point that farm income per working unit is considerably lower (supposedly by 40%) than in the rest of the economy. That is a highly questionable argument for income support: if governments were to try and make income per working unit (or per unit of capital) equal across all sectors through support payments, then we could give up on the market economy in the first place.
Income support must be based not on a comparison of factor incomes but on social criteria, i.e. on family income relative to a socially accepted threshold. But that is precisely what direct payments cannot achieve as they are granted on a flat rate per hectare basis, irrespective of the actual income situation of the recipient. As a matter of fact, the Commission has in the past not shown interest in generating statistics that would allow measuring the family incomes of farm households. The central motivation behind continued direct payments, i.e. income support, is completely void of logic and evidence.
What is more, direct payments get capitalised in land values. That means that tenants, farming more than half of Europe’s agricultural land, have little if any benefit of the payments. It also means that the CAP makes the most important and specific factor of production in agriculture, i.e. land, more expensive and thereby undermines the international competitiveness of Europe’s agriculture.
What the Commission should have proposed
Instead of trying desperately to defend continued, though somewhat differently distributed, direct payments, what should the Commission have proposed? The most convincing approach would have been a forward-looking continuation of the main thrust of CAP reforms achieved by the last three Commissioners for agriculture. The reform process began with replacing price support by direct payments, and then continued with the decoupling of payments from production. The next logical step would now be to target the payments to well defined specific objectives. The Commission’s Communication lists several objectives that come to mind in this context. They are generally to do with services agriculture can provide to society and which are not remunerated by the market. Environment, biodiversity, climate change are some of the most relevant areas in that context.
The Communication proposes a new “greening” component of direct payments that would target such objectives. However, these payments would be generalised and non-contractual, i.e. very close to the cross-compliance feature of the current payments, even though the Commission says that they would relate to actions beyond cross-compliance. This tastes very much like old wine in new bottles.
For payments to be really well targeted, the first requirement is to identify the desired nature and volume of such services. This will typically have to be done on a rather disaggregate territorial basis as natural and economic conditions vary between individual locations. The next step is to determine the necessary and appropriate level of payment to be granted for these services. Finally, payments are made according to the actual service delivered on a contractual basis.
In institutional terms, this progression from decoupling to targeting could be achieved by moving money from the first to the second pillar of the CAP, provided the nature and implementation of measures in the second pillar is appropriately defined. This should not, though, lead to an overall increase of expenditure as is currently the case with modulation where member countries need to complement the money transferred to the second pillar with their national co-financing. The level of union expenditure should, therefore, be reduced and the member countries could use some of the money saved for targeted payments in their territories. This transfer back to member countries of some CAP expenditure, and of the related decision making power, should not be seen as a re-nationalisation of the CAP. The framework for policies would continue to be decided in Brussels, as would the nature of, and expenditure on, all measures of Union-wide significance (climate change being one prominent example).
The shift from per hectare payments to the new targeted payments should occur gradually, over a defined period of time. The capacity of farmers to adjust to the declining level of per hectare payments could be enhanced if the total amount of future payments per hectare were to be guaranteed in an appropriate document handed out to the individual farmer. Farmers could then sell these documents like bonds to the capital market and use the cash revenue for investments.
Regarding market policies, the Communication doesn’t open up new avenues. But at least it also doesn’t question the end of dairy quotas in 2015. And it speaks of the need to improve efficiency and competitiveness in the sugar sector, possibly through a “non-disruptive end of the quotas at a date to be defined” – a laudable perspective.
The Commission’s Communication is its first shot at the design of the CAP for the post-2013 period. There is still time to improve on this record in the coming months. If the Commission wants to develop a stance on agricultural policy that is sufficiently convincing to be politically sustainable then it needs to propose a policy that creates value for money. For that to be achieved, another true reform is required. What is proposed in the Communication is at best a conservative revision, but not really a reform.
This article was originally published in Agra Europe – see www.agraeurope.com.