EC Communication on CAP Reform Could Potentially Have Some Lessons for ACP Countries

There are two areas of the EC communication on CAP reform which could have a bearing on ACP-EU agro-food sector relations: those aspects dealing with the external trade dimensions of the CAP (given the EU is the single largest farm exporter in the world) and those aspects dealing with internal EU policies on managing price volatility and market crisis situations. The EC continues to pay no attention to the impact implementation of EU agricultural policy measures have on ACP markets on which ACP agricultural producers and agro-processors depend.  The EC focuses on how EU trade policies will open up further opportunities for EU agro-food exporters, ignoring African aspirations for the structural development of their own agro-food sectors. The EC could usefully extend it current regulatory initiatives to combat unfair trading practices (UTPs) along agro-food supply chains to of ACP-EU agro-food product supply chains. It could also usefully extend some of its innovative models of loan financing for on-farm investment to ACP producers.

No fundamental changes to the CAP are being proposed which carry direct implications for ACP countries. As Professor Alan Mathews has pointed out already  ‘there has been significant reform of the CAP during recent decades’ involving a movement away from price support to decoupled forms of direct aid payments to farmers (pillar 1), complemented by ‘support for investment in rural areas’ (pillar 2).  Against the background while maintaining continued support to EU agricultural producers the CAP reform process has sought to promote ‘greater market orientation’ (1).

However as Professor Mathews points out, the logical next step would be to move towards ‘targeted payments focused on encouraging innovation, quality production, the production of public goods and other specific goals’(1).  This logical next step is only tangentially addressed in the EC’s communication on the ‘Future of Food and Farming (2).

Perhaps more significantly there has been no back-sliding on the existing reforms, despite pressure from some farming groups for a return to price support and production controls. The EC does however already have scope for the use of such tools in response to specific market crisis situations.

At the policy level greater emphasis is being placed on environmental and climate measures and on subsidiarity, with greater autonomy being given to member states in designing, implementing and monitoring programmes to achieve common EU objectives using CAP funding. This however needs to take place within the framework of a national ‘CAP strategic Plan’ which requires prior approval by the EC.

There are two dimensions to the EC communication of ‘Future of Food and Farming’ of relevance to ACP countries, notably: the external trade dimensions of the CAP (given the EU is the single largest farm exporter in the world) and internal EU policies on managing price volatility and market crisis situations.

The EC in its communication acknowledges the global implications which the CAP has and maintains ‘close attention must be paid to these when decisions are taken about the policy’s future’. The Communication reiterates the EUs commitment to ‘policy coherence for development’, but asserts ‘the CAP is and will continue to be coherent with the EU development policy’.

In justifying this statement about the coherence of EU agricultural policy with EU development policy, the EC focusses on shared policy objectives in regard to promoting sustainable agriculture and poverty eradication. The communication asserts ‘further liberalisation of trade and increased participation in global value chains will allow the EU agro-food sector to develop exports even further, responding to growing middle-class demand worldwide’.

This perspective on the benefits of liberalisation undertaken by third country partner contrasts sharply with the EC’s observation that internally ‘specific agricultural sectors cannot withstand full trade liberalisation and unfettered competition with imports’.  In this context the EC communications calls for the sensitivity of these specific products to be duly recognised and reflected in trade negotiations.  It is argued ways need to be explored on ‘how to address the geographical imbalances of advantages and disadvantages that affect the farm sector within the Union as a result of EU trade agreements’.

In terms of price volatility and market crisis situations the EC communication notes how ‘the higher frequency of risks’ arising in part from the EU CAP reform process calls for ‘a more systematic approach’ to managing risk and price volatility than so far adopted.

The EC notes how in the EU ‘every year, at least 20% of farmers lose more than 30% of their income compared with the average of the last three years’.  Against this background the EC is increasingly looking for a mixed approach to market crisis management consisting of a combination of ‘EU-level support with Member States’ national tools and private sector instruments’ (2).

Options under consideration include setting up ‘a sector-specific income stabilisation tool, with lower loss thresholds to trigger compensation’, schemes to mutualise risk sharing and encouraging greater cooperation amongst farmers. However the EC plans to look very critically at whether new tools are needed and the form any such new tools should take (3).

This needs to be seen in a context where existing EU supported risk management instruments have had little take up. Against this background the EC is envisaging creating a new platform for reviewing the experience of risk management in the EU.  This would bring together ‘expert groups, working panels, seminars and events…. around specific risk management topics’ (3).

The EC also wants to boost on-farm investment. However it recognises ‘public funds available for grants are not sufficient to address the growing investment needs’ in the EU agricultural sector. It estimates the financing gap in the agriculture sector at ‘between €1.6 and €4.1 billion for short-term loans, and between €5.5 and €14.8 billion for long-term loans’. The EC see’s ‘financial instruments, such as loans, guarantees and equity funds’ as a means of easing access to finance for farmers and agro-food processors who would otherwise ‘find it difficult to obtain the necessary funds’ (3).  It is hoped the investment mobilised will help farmers take up new improved technologies which will improve the competitiveness of EU farmers.

The strengthening of producer organisations is also see as a means of helping farmers reduce costs and improve their bargaining position in the supply chain. The latter dimension is seen as particularly important, with EU regulatory proposals on unfair trading practices (UTPs) currently under formulation (see companion article ‘Proposed EC Regulatory Initiative on UTPs Need to be Extended to ACP-EU Supply Chains’, 8 September 2017).

Overall the EC communication declares ‘the CAP should play a larger role in helping farmers make more money from the market’.

Comment and Analysis

In asserting ‘the CAP is and will continue to be coherent with the EU development policy’ EC focusses on shared policy objectives in regard to promoting sustainable agriculture and poverty eradication.  However the communication pays no attention to the impact implementation of EU agricultural policy measures have on ACP markets on which ACP agricultural producers and agro-processors depend (for example in the poultry and dairy sectors). It ignores the direct link between EU policies, production outcomes and trade consequences despite recognising that ‘direct aid payments remain an essential part of the CAP’.  It ignores the question what would be the production and trade outcomes in relations with ACP countries of discontinuing direct aid payments to EU producers, which account for ‘46% of the income of the EU farming community’ in the context of  the low profitability of farming in the EU (2).

Without the EU’s de-coupled direct aid payments and coupled payments made on half of the EU dairy herd, milk production in the EU would not be so high and nor would there be the accumulated stocks of 380,000 tonnes of milk powder, which overhang global markets and depresses milk powder prices (see companion article ‘Fears over impact EU SMP stocks on global dairy prices being realized, 2 November 2017).  This continues to ensure that in many ACP countries it continues to be far cheaper for ACP dairy processors to import milk powders and reconstitute them into dairy products than it is to source milk locally.

Equally without the EU’s highly controlled trade regime for poultry meat imports, it is unlikely the continuous growth in EU poultry meat, which generates growing volumes of unwanted poultry parts which are then sold at ridiculously low prices on Sub-Saharan African markets, would have taken place on such a scale as has been the case in recent years production (EU poultry meat production up grew 18.9% between 2010 and 2016, with a further projected growth of 1.8% in 2017 and 1.9% in 2019 despite regular AI outbreaks).

These dimensions of the external effects of the CAP are simply not on the EU’s radar screen, since the issues it would rise are so central to the European model of agricultural production, a model which the EU is firmly committed to maintaining and expanding.  In this context it is noteworthy the EC communication focusses on how the EU trade policies being promoted will open up further opportunities for EU agro-food exporters.  This policy emphasis singularly ignores African aspirations to develop their own agro-food sectors so that more employment is created and more wealth is retained locally in response to rising agro-food sector demand across Africa.

Despite this myopic EC approach to the external effects of the CAP there are elements of the communication which could be built on by the ACP in dialogue with the EU.  For example the policy emphasis placed on improving the bargaining position of farmers within supply chains, could usefully be taken up with the aim of securing the extension of current internal EU regulatory initiatives aimed at ending unfair trading practices (UTPs) to the operation of ACP-EU agro-food product supply chains.

This would need to address not only the sourcing practices of supermarkets, but also the practices of importers, subjecting them to the same standards as applied to supermarkets in their dealings with farmers in certain EU member states (e.g. the UK’s Groceries Code of Practice, see companion article ‘Role of UK Groceries Code Adjudicator could be extended’, 17 July  2017).

Potentially useful lessons could also be drawn from the innovative financing packages being put together to support on-farm investment, where repayment obligations are tied to the movement of volatile commodity prices (5).

In this context the EC may even wish to consider some form of return to farm income stabilisation initiatives, implemented directly in association with producer associations and local financial institutions, via the modulation of loan repayment obligations in the light of movements in market prices.

(1) CAP Reform, ‘Leaked draft of the Commission Communication on Future of the CAP’, 25 October 2017
(2) EC, ‘The Future of Food and Farming’, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, 29 November 2017
(3) EC, ‘The future of food and farming – Communication on the Common Agricultural Policy post-2020’, Memo 29 November 2017
(4) EC, ‘EU Market Situation for Poultry’, Committee for the Common Organisation of the Agricultural Markets, 23 November 2017
(5), ‘Glanbia launch new cheap loan fund (here’s how it works)’, 9 March 2016