It used to be that discussion of European farm policy was confined to Brussels bureaucrats, with the occasional eruption of protests by farmers threatened by freer international trade. But try mentioning farm subsidies at a dinner party these days. The ensuing conversation-well informed or otherwise-will range from mad-cow disease to foot and mouth to organic farming. And while there may be some disagreements, one thing is certain: the Common Agricultural Policy (CAP) will be seen as the main culprit for the problems of British and European agriculture.
The story isn't that different elsewhere in Europe. Even in France, where there has long been a consensus among governments, consumers and farmers in defence of EU subsidies, the BSE crisis has provoked a rethink. Add to this the high cost of extending the system to the 13 countries seeking to join the EU, plus the demands for change from other members of the World Trade Organisation, and the CAP looks increasingly shaky.
Goodbye to the CAP?
That is good news for those who believe that the CAP is in need of reform. But the level of disagreement over what has gone wrong in European farming underscores the difficulty in coming up with remedies. Moreover, as past reforms of the CAP have shown, the horse-trading so common to the EU process often produces unsatisfactory results. And there are big differences in the interests of the member states with farmers ranging from Portuguese smallholdings to the grain barons of East Anglia and northern France.
Although the food crises have created an appetite for radical change-especially in Germany-they have also added to the confusion surrounding the CAP and farm policy in general. At one end of the spectrum the CAP is blamed for sheltering inefficient small producers from global competition; at the other end it is blamed for intensive production, bad food and destruction of the environment.
That both these are partially true bears witness to the complexity-and durability-of the CAP. This system of domestic supports, external protection and export subsidies was established in 1962, when the memory of wartime food shortages was still fresh. Its aim was to create an internal market in agricultural goods while at the same time providing Europe with a secure supply of food and its farmers a viable income. The problem is that the CAP worked too well, at least when it came to producing food. By setting high internal prices and border protection, the CAP created a guaranteed market for Europe's farmers, who knew they could sell into storage in the absence of real customers. With new chemicals and farm equipment providing rapid gains in productivity, it wasn't long before the then EEC developed its notorious food mountains. Export subsidies, meanwhile, made up the difference between high internal prices and lower world prices, allowing Europe to dispose of surplus products and conquer foreign markets that it otherwise might not have won. These subsidised exports depressed world commodity markets, reducing the incomes of other producer countries, including those in the developing world.
By 1990, however, the prospect of ever growing CAP expenditure combined with intense pressure from the US and other exporters convinced European policy makers of the need for bigger changes. These began with the so-called MacSharry reforms in 1992, which reduced guaranteed price levels and compensated farmers with direct subsidies. This marked an important shift, but it affected a limited number of crops, notably cereals. Moreover, because payments were still in part tied to farm size or numbers of animals, the biggest producers continued to receive hefty sums. So while the reforms curtailed the EU's most chronic overproduction and reduced the reliance on export subsidies, especially for grain, they did not cut spending. On the contrary, the direct aids to farmers has helped swell the EU's farm budget to an estimated 44 billion euros this year, up from 34 billion euros in 1993. Farm spending now accounts for just under half of the EU budget, compared with two-thirds of the budget in the 1980s. But the budget itself has more than doubled from 43 billion euros in 1988 to 93 billion euros this year, in part reflecting increases in aid to less-developed EU regions.
The budgetary strain of enlargement led to calls for more change, which duly arrived in the form of the Agenda 2000 accord, adopted by EU leaders at their Berlin summit in March 1999. While Agenda 2000 deepens and extends to more sectors the price cuts begun in 1992, the changes-which France succeeded in watering down-still left the EU with a system of direct payment to farmers and thus the potential for over production.
In the hope of limiting the cost of enlargement, the European commission initially resisted the idea of providing such direct payments to farmers in central and eastern Europe. Faced with accusations of double standards, however, the commission now seems to have backed down. Estimates of what it would cost to extend the current CAP to the ten nations that may join the EU by 2005 range from 10 billion euros to 25 billion euros a year, although the commission isn't offering any calculations on this touchy subject.
The other persistent force for CAP reform revolves around Europe's position in the international trading system. Just as the MacSharry reforms came partly in response to the decision to include agriculture for the first time in the General Agreement on Tariffs and Trade, the EU is again involved in global talks on agriculture. These were called for under the 1994 Uruguay Round accords, which were felt by many not to have gone far enough in liberalising world trade in agriculture. The negotiations currently underway in Geneva under the auspices of the WTO are still at the shadow-boxing stage but are meant to conclude in the next few years, whether or not there is a new global trade round.
External and internal reform pressure
The CAP certainly looks indefensible when viewed from the rest of the world. The combination of tariffs and domestic supports keep EU prices 30 per cent to 35 per cent above world prices, higher for items such as sugar and rice. Producers in the Cairns group of exporters, including Australia, New Zealand, Argentina, Brazil and Chile, are particularly critical of the protection offered to European producers and the EU's continued use of export subsidies, albeit at a reduced level. (Export refunds account for 10 per cent of the agricultural budget this year, compared with 25 per cent in 1992. The EU has offered further cuts, if other WTO members follow suit.)
Developing countries also routinely condemn what they see as the pampering of farmers in one of the world's richest regions. The EU has gained some kudos for its decision to grant duty-free access to all products, except arms, from the world's least developed countries. But other aspects of EU protection in agriculture still rankle with the developing world. The EU's imposition of much higher import tariffs on processed foods than on basic commodities, for example, is especially frustrating for developing countries seeking to move into the higher value side of agriculture.
Of course, Europe isn't the only place where agriculture is subsidised or protected. US farm subsidies have risen sharply in the past few years; the New York Times recently cited the case of a Texas farmer who received $1.38m in federal payments from 1986 to 1990. But the measures used by the OECD show the EU running well ahead of the US in terms of overall producer support and protection. (The commission contends that this isn't the case if one looks at subsidies per farmer, because the EU has many more farmers than the US.)
In addition to calls for greater access to the EU market and the phasing out of export supports, other countries are also pressing the EU to decouple its farm subsidies from production. This again puts the spotlight on the direct aids provided to farmers since the EU began reducing guaranteed prices. Given the continued rise in the EU's farm budget, it is clear that the direct payments are still encouraging production, even if the link is less automatic than with price supports. They are also continuing to channel subsidies to the biggest farmers-nearly 80 per cent of subsidies still go to about 20 per cent of farmers. This undermines the claim that the CAP protects small farmers. It also raises questions about how efficient Europe's big farmers really are.
In conjunction with these "external" reasons for further CAP reform, there are more powerful calls for change coming from within Europe. The recent food crises-in particular mad-cow disease and Belgium's dioxin scare-have led to criticism from people who rarely gave a thought to CAP before. The question being asked is "why are we paying farmers billions to produce food we don't want to eat?" The increased focus on food quality and treatment of animals has also raised awareness about issues such as the pollution caused by fertilisers and pesticides.
The number of organic farms rose from 6,300 in 1985 to over 100,000 in 1998, with the biggest increases coming after the 1992 reforms. Still, organic farming accounts for less than 2 per cent of agricultural area in the EU, or a little more than 1 per cent of farms. They are commonest in Sweden, Austria, Finland, Greece, Spain and Italy. Organic farms are subject to EU regulations, and are not totally chemical-free. As organic farming grows, there will be increased scrutiny of the sector, as well as a differentiation between food production methods that improve food quality and those that safeguard the environment, which aren't always the same.
Pressure for farm reform is also coming from Germany, where the appointment of a Green party agriculture minister has combined with growing concern over the size of the country's contribution to the EU budget. Previous ministers have tended to bite the bullet on agriculture budgets to protect the interests of small farmers in Bavaria. Now Germany is pushing for more organic farming and a more environmentally friendly CAP. Some German politicians also want to see much more spending from national budgets.
Reform of the cap, but what kind?
All these forces mean that next year's review of the CAP, called for under Agenda 2000, will lead to further reform. But EU agriculture commissioner Franz Fischler has yet to make detailed proposals, and is unlikely to do so until after the French elections next spring. None the less, he is hinting at a shift away from production subsidies altogether to wider rural development schemes. These could involve lump sums for less well-off farmers, payments to encourage better environmental practices and more funding for tourism and other non-agricultural aspects of rural development.
"Fischler wants to do as much as he can get away with. He wants to move out of production subsidies into environmental and social subsidies," says Brian Gardner, a farm trade analyst for PRM Consultants in Brussels. In this vein, Fischler has started making the case for reform while still defending the CAP. "The issue is not whether to support agriculture but how to support it," he wrote recently in the Financial Times. Specifically, Fischler says that the EU spends too little on non-agricultural rural development, which accounts for just 10 per cent of the CAP budget. The commissioner's comments chime with the shift in several countries from ministries which represented only the farming interest to departments with a broader remit for rural affairs-in the case of Britain to a department for environment, food and rural affairs.
"At long last, a really significant reform has to happen. A halfway house will not do," says Jules Pretty of Essex University. Pretty, says the CAP is "a supertanker that takes 20 years to turn around," and proposes a big expansion of agri-environmental schemes, under which subsidies are linked to specific practices.
If EU countries do opt for subsidies that discourage some practices and encourage others, they will need methods and personnel to ensure that the payments are being earned. Advocates of this system aren't calling for the hundreds of people in Brussels who currently administer the CAP to don boots and head for the countryside. Instead, monitoring would be handled by environmental agencies at the local level, with water being checked for pesticides and so on. The challenge is to avoid fraud without creating a costly bureaucracy. Given that such a system would be more decentralised, with countries given some leeway over environmental standards, the commission would have to police subsidies to ensure they don't distort competition, much in the way it now controls state aid to industry.
One novel feature of the Agenda 2000 accord was the option for EU countries to reduce direct payments to farmers and channel the money to other rural programmes. So far, Britain, France and Portugal are the only countries to take advantage of this provision, although Germany is about to do so. The reason the take-up has not been greater probably reflects the cost to national exchequers, which are required to match the EU funding.
Up to now the amounts involved are small. The British government is reducing direct payments to farmers by 2.5 per cent this year, with the reduction due to reach 5 per cent in 2007. Unlike Britain, and despite opposition from the main farmers union, the French government is applying the scheme in a way that benefits small producers. It is also reducing direct payments by 2.5 per cent, but the biggest farms can lose up to 20 per cent of aid, while the smallest remain unaffected.
Supermarkets are often blamed for the concentration into ever bigger units, in part because of the large quantities demanded by the chains. Given that supermarkets will not go away, smaller farmers may well have to work together through cooperatives to capture their business. This already happens on the continent, but is less common in Britain.
Big farms, little farms
Although programmes of broader rural support look likely to gain increased public and government support in Europe, they only partly address the problem of ensuring that farmers grow products people want to buy. A view shared by many experts is that the CAP and other post-war agriculture policies have divorced farmers too far from their customers.
Nina Planck, the founder and director of London Farmers' Markets, believes British farmers should look less to global markets and more to regional and local ones. Planck points to the growth in the number of London farmers' markets-from the first one in Islington in June 1999 to ten this summer-as proof that a local market exists. While she accepts that the recent crises over food quality may have helped this expansion, Planck sees the communication between sellers and buyers at such markets as a continued advantage.
The gap between producers and consumers is somewhat less acute on the other side of the channel, where street markets never went out of fashion and where family ties between those in the city and country are stronger. Still, radical ideas for overhauling the CAP are now far more influential. Renate K?nast, Germany's first Green farms minister, is not the only one determined to see EU farm policy redirected toward improving the environment.
As in the past, the biggest resistance to change will come from the farming lobbies, although their line is more nuanced than before. Jean-Paul Bastian, vice-president of FNSEA, France's main farmers union, sees the future for European agriculture in higher quality products, niche markets and an improved environment. However, Bastian says, "I'm not against reform, but we have to respect the already agreed deadlines." In effect, this means putting off change until the expiry of the Agenda 2000 accord in 2006.
Bastian also draws a distinction between CAP policies for internationally traded commodities, such as cereals, and other products (including beef and dairy). He would be willing to see reduced protection on cereals, providing other WTO countries did the same. This is unsurprising, as France has some of Europe's most efficient cereal producers, who could be expected to fare well internationally without subsidies or border protection.
Such positions illustrate the difficulty the EU will have in agreeing on a new CAP reform. With each country pressing for the most favourable conditions for its own agriculture, a messy compromise is likely.
The other large cleavage that can be expected involves the dual debate over big versus small farms and intensive versus extensive production. Here, there is much confusion over the impact of the CAP. It is true that by rewarding higher levels of production, European subsidies have encouraged farmers to grow more cereals or to raise more livestock. But it is also the case that the most intensive and least attractive practices are in pork and poultry farming, which are two of the least protected and subsidised sectors in the EU. Moreover, overuse of fertilisers and pesticides, as well as cases of BSE, have been found on small as well as big farms.
This has prompted some to argue in favour of continued protection of EU agriculture to prevent farmers from having to compete with lower cost produce from abroad and to keep small farmers on the land. Advocates of a more open trading system reject this view. "The idea of blaming free trade for everything that's happening in Europe is absurd," says a former Irish agriculture official. He also questions the romanticisation of farming. "My parents came from farms in the west of Ireland, and they couldn't wait to get away," he says.
Brian Gardner of PRM Consultants sees two different types of agriculture emerging from the next CAP reform. "In the real world, we've got to have agriculture that is competitive," he says. This means continued large-scale arable farming in the plains of East Anglia and northern France (and parts of central and eastern Europe) combined with subsidised and more extensive niche production, including beef and sheep farming in Europe's less-favoured hilly regions. "There's no conflict between the two. The real conflict is between producing the bulk of the food? and protecting the environment in places like the Netherlands and central England," he says.
This kind of CAP could go some way toward meeting demands from the EU's trading partners for a shift away from production subsidies. It would also mean a further reduction in the number of farmers, a trend that is occurring anyway because of an ageing farm population and decline in farm incomes relative to other sectors. The tendency toward bigger farms is also likely to accelerate, especially in France and southern Europe where average farm size is smaller than in Britain. But providing the EU really does move public funding into rural development and environmental protection it should be able to keep enough people in the countryside to avoid the rural depopulation seen in the US.
A pamphlet on this subject by Julie Wolf will be published by the Centre for European Reform
