Summary
A study for the European Committee of the Regions has found ‘CAP subsidies continue to have a production-stimulating effect’, with EU production and exports being greater than would be the case in the absence of CAP subsidies. The case studies in the report look at the effects of CAP subsidies in regard to milk powders, chicken meat and processed tomato products on vulnerable developing countries (VDCs – which includes all ACP countries). It draws nuanced conclusions in regard to the effects of the provision of CAP subsidies but on the basis of the terms of reference of the report largely neglects the effects of CAP related EU agricultural trade policies on VDCs. The report calls for: ‘greater disciplines on coupled support payments’; adjustment to EU market management measures so they do not destabilize prices for VDC producers; ‘the phasing out of decoupled payments for income support’, and ‘the creation of a platform allowing stakeholders from VDCs to be involved in a dialogue on PCD and agri-food trade issues’.
A study has been completed for the European Committee of the Regions on ‘the impact of current CAP subsidies on the price of EU food produced and exported to developing countries’. The aim of the study is to ‘contribute to the current debate on how the proposed reform of the Common Agricultural Policy may minimise its impact on developing countries coherently with EU development cooperation’s objectives’. Given the diversity amongst developing countries the study focuses on ‘developing countries facing particular problems of food insecurity’ (1).
These are referred to a ‘vulnerable’ developing countries (VDCs) and comprise ‘the Least Developed Countries, the countries of Sub-Saharan Africa, and the African, Caribbean and Pacific countries that are signatories to the Cotonou Agreement with the EU’ (1).
The study looked first at ‘whether CAP subsidies lead to countervailable subsidies or dumping’. Countervailable subsidies ‘refers to price suppression and lost sales by other countries’, while dumping refers to ‘export sales below the cost of production in the EU’ (1).
The analysis found ‘CAP subsidies continue to have a production-stimulating effect despite the reform path of the CAP in recent decades’. This is mainly the result of ‘decoupled direct payments but also coupled direct payments and productivity-enhancing investments under Pillar 2’. This creates a situation where as a result of the deployment of these EU policy tools ‘EU agricultural production is greater and so are net exports as a result’. It was estimated ‘EU production is around 5%-6% higher than it might be in the absence of CAP subsidies’ (1).
Against this background case studies looked at the specific effects in regard to milk powders, chicken meat and processed tomato products.
In the dairy sector it was found ‘the EU supplies around 35% of whole milk powder (WMP) imports by VDCs and nearly all of its fat-filled milk powder (FFMP) imports, though its share in skimmed milk powder (SMP) imports is lower at 15%, with New Zealand and the US being other major suppliers’.
VDC markets have been of growing importance to the EU for fat filled milk powder exporters. The analysis suggested that in the case of milk powders recent growth expansion has been driven by ‘the elimination of milk quotas in 2015 which has allowed an expansion in EU dairy product exports despite a fall in world market prices’. However it was held ‘this was a once-off change’ and did not reflect the impact of any changes in the CAP subsidy policy (1).
This being noted the report highlights how ‘coupled and decoupled payments to farmers result in higher EU milk production than would otherwise be the case in the absence of these payments’. This ‘higher EU milk production allows higher production of dairy products…which has the effect of lowering world market prices’. This impact is described as ‘limited but not negligible’ (1).
The report highlighted how ‘the main growth in milk powder exports to VDCs has been FFMPs’, which replace expensive butter fat with vegetable fat resulting in ‘a milk powder that can be sold at a considerably lower price than competitive conventional milk powders’. This availability of low priced FFMP ‘intensifies the competitive pressure on local milk production from imported milk powder’ (1).
It is held that this technological innovation evolved independently from the deployment of CAP subsidies and would therefore ‘not be reversed if CAP subsidies were to disappear (1).
In the chicken meat sector it was noted how ‘the EU now accounts for almost half (46%) of total imports in the main VDC import markets, with the remainder supplied by Brazil and the US’. The analysis maintains ‘there is no evidence that CAP subsidies have depressed the price of chicken meat from the EU to VDCs’, with the price of broiler meat in the EU being ‘higher than that of other exporting countries’. This is attributed to ‘higher feed costs and higher environmental, animal welfare and food safety standards’ in the EU (1).
The analysis notes how it is necessary for the EU to maintain high import tariffs on chicken meat imports into the EU. It is held ‘these import barriers reduce EU consumption of chicken meat and reduce the global supply of dark meat which is exported to VDCs’. The analysis of the EU’s growing export trade in frozen chicken meat to VDCs is held to be based on ‘distinct differences in consumer preferences for different types of chicken meat in the EU and export markets’ (1).
The analysis nevertheless notes how ‘even if these exports are not the result of CAP subsidies, local poultry producers find it difficult to compete with these cheap imports’. As a result ‘stronger measures to develop the local industry’ are held to be required (1).
With regard to EU exports of tomato paste there is held to be ‘a potential effect of CAP subsidies on the price of exports of this product’, although this is not held to be significant. The report highlights how ‘many EU countries maintain coupled support for processing tomatoes under the Voluntary Coupled Support (VCS) scheme’. This is held to be compounded by the foundations of decoupled payments to tomato producers which de facto act as a form of coupled support. It is held ‘both these effects can stimulate the production of tomatoes and lower the cost of raw material to the processors of tomato paste’ (1).
This being noted it is suggested the economic evidence would lead to the conclusion ‘in practice the impact on the price of tomato paste is insignificant’ (1). However it is highlighted how ‘a legal analysis can arrive at a different conclusion, as shown by the imposition of anti-dumping duties on certain Italian exporters of processed and preserved tomato products by Australia’ (1).
Recommendations emerging from the analysis include:
- a need for ‘greater disciplines on coupled support payments’;
- a need to adjust EU market management measures so they do not destabilize prices for VDC producers;
- a need to phase out of decoupled payments for income support, and
- a need for a ‘platform allowing stakeholders from VDCs to be involved in a dialogue on PCD and agri-food trade issues’ (1).
| Comment and Analysis
The most significant overall conclusion from the analysis is that EU agricultural production is higher and exports larger as a result of CAP subsidies. This is particularly significant in sectors where the EU plays a dominant role and markets are sensitive to even small surpluses. While it is asserted the innovations which led to the production of fat filled milk powder occurred independently of CAP subsidies, the emergence of this innovation offers an important means of disposal of milk powders produced to take surplus EU milk production off the market. This removal of milk surpluses from the domestic market plays an important role in supporting domestic EU milk prices. This can be seen as central to EU dairy market management strategies at a time of market crisis situations. This gives rise to market management strategies which only as a last resort encourage or allow reductions of milk production in response to market crisis situations. This has seen a far higher international market focus emerge for EU dairy companies than is the case for US dairy companies. EU dairy companies are now increasingly global in orientation in terms of product development and in their marketing strategies than is the case for US companies. Equally the expansion of fat filled milk powder production cannot be divorced from the emergence of huge EU milk powder stocks as a result of the market crisis management measures introduced in response to the 2014-6 milk market crisis. Against this background the recommendation to review and adjust EU market management measures can be seen as particularly relevant, given the potential dairy market disruptions which could arise under a no-deal Brexit. In regard to the poultry meat sector the analysis consciously ignores the impact of EU CAP related trade policy measures on EU exports since this does not fall within the remit of the report which is focused on current proposals for the reform of the CAP. This omission, while understandable given the focus of the report, is unfortunate since EU poultry meat trade policies have effectively managed the import trade so that EU domestic poultry producers have been able to fully capitalize on increasing EU consumption of white meat. The table below sets out the growth in EU poultry consumption, production imports and exports since 2010. It reveals a 22.5% increase in EU poultry meat production, a 19.3% increase in EU poultry meat consumption, a 37.4% increase in EU poultry meat exports and a 3.8% decline in EU poultry meat imports between 2010 and 2018. Thus while the report suggests EU poultry meat trade barriers have reduced EU poultry meat consumption and has reduced the global supply of ‘dark meat’ exported to VDCs, the reality is there has bene a strong growth in EU poultry meat consumption with this being exclusively met from increased EU domestic poultry meat production. EU poultry meat production, consumption, exports and imports 2010-2018 (‘000 tonnes)
Source: EC, ‘EU Agricultural Outlook for Markets and Income 2018-2030, tables, December 2018 This expansion EU poultry meat production has generated an expansion of EU production of poultry parts which, given the limited market in the EU need to be exported, increasingly to African markets. These exports are facilitated by the cross subsidization of poultry meat cuts which trade protection allows EU producers to practice. This generates higher prices for poultry breast meat than would otherwise be the case in the absence of a protective, carefully managed trade regime. This allows EU poultry parts to be exported at prices which are highly competitive, despite the overall average cost disadvantages EU producers face compared to their international competitor (see companion epamonitoring.net article ‘Report highlights vulnerability of EU poultry sector to liberalisation of trade in poultry meat’, 5 September 2017). In terms of tomato paste while the analysis suggests the impact of CAP instruments on the price of tomato paste is insignificant, the higher production which CAP policies promote in the tomato sector can give rise to higher volumes of exports. This can prove disruptive of targeted mark in VDCs where efforts are underway to get local paste production facilities off the ground. Such facilities would be able to remove surplus tomato production from local markets, helping to support prices on local fresh tomato markets and feeding into the food processing sector. The absence of such safety valve outlets can lead to considerable volatility on tomato markets and undermine efforts to sustainably develop local production of tomatoes for local markets. |
Sources:
(1) CAPreform, ‘Impact of the CAP on developing countries’, 27 September 2019
http://capreform.eu/impact-of-the-cap-on-developing-countries/
(2) Committee of the Regions, Commission for Natural Resources, ‘Evaluation of the impact of the current CAP on the agriculture of developing countries’, 2019
https://cor.europa.eu/en/engage/studies/Documents/CAP-developing-countries.pdf