Summary
At the beginning of June 2018 the EC issued a range of documents setting out both proposals for the amendment of CAP regulations and the background to these proposals. The EC sought to outline the developments since 2013 which required further reforms to be introduced. The EC also highlighted the important role which EU agricultural support plays in enhancing farm incomes, and by implication, sustaining agricultural production. The EC also highlighted the growing importance of risk management as global price movements begin to transmit onto EU markets. The EC highlighted the desire of EU member states governments to minimise changes to support instruments and support levels. The preference of some member state governments for higher levels of coupled support could well see an expansion of the use of this instrument as more discretionary powers are devolved to EU member states. While the EC has sought to assert the non-trade distorting nature of EU agricultural support instruments, this seems to conflate the compatibility of EU support instruments with WTO rules with the absence of any trade consequences for developing country partners.
The New Factors an Amended CAP Has to Address
In the explanatory memorandum to the June 2018 EC proposals for the amendment of the common organization of the market for agricultural products and associated regulations, the EC has outlined the developments since 2013 which necessitated further amendments to the common agricultural policy (CAP) regulations. These included:
- the substantial fall in agricultural prices which has occurred linked to ‘macroeconomic factors, geopolitical tensions and other forces’
- the shift in the focus of global trade negotiations from the multilateral to bilateral level
- the EU’s new international commitments, including in regard to climate change and the SDGs
- the emergence of shortcomings in the current system in addressing the ‘ongoing challenges related to the economic health of the farm sector, care for the environment, action over climate change, and a strong and economic and social fabric for the EU’s rural areas’.
- the need for a modernised Common Agricultural Policy which supports ‘the transition towards a fully sustainable agricultural sector and the development of vibrant rural areas, providing secure, safe and high-quality food for over 500 million consumers’ (1).
According to the EC a ‘future-proofed CAP’ needs to be ‘simpler, smarter and modern’, with a rebalancing of responsibilities of the EU and member states. The EC proposals aim at ‘improving policy coherence across the future CAP and with other EU objectives’ (1).
The Importance of CAP Instruments to EU Agriculture
In the background document ‘Modernising and Simplifying the CAP: Economic Challenges facing EU Agriculture’ (2) the EC sought to explain the underlying justification for the CAP. It highlighted how farming incomes in the EU are on average ‘only 40% of average wages in the EU-28 economy’, with the EC suggesting that ‘driven by stronger increases in costs compared to value of production, total agricultural income (in real terms) is expected to decline considerably’ in the EU, falling some 14% by 2026.
In addition there is considerable income volatility in the agricultural sector ‘with up to 20% of farmers experiencing income drops above 30% each year’. It is anticipated that ‘increased openness to world markets and climate change is expected to exacerbate risks’ in the coming period (2). Horticulture and grainivores with income volatility of 32%, alongside cereals producers and producers of permanent crops with income volatility of 34% are seen as particularly vulnerable (2).
It is against this background that the EC highlights how:
- direct payments…currently provide an income safety-net that supports the resilience of 7 million farms (3);
- ‘currently over 90% of direct support does not distort trade’ (4), with this implying an acknowledgement that slightly under 10% of direct support is trade distorting
- ‘direct payments support the level of income and generally allow reducing the income gap between agriculture and the other sectors of the economy’;
- ‘direct payments contribute significantly to the risk coverage via the provision of a stable yearly income buffer’;
- ‘in the beef sector … direct payments represent between 60% and 70% of the income’ (indeed in parts of the EC’s analysis EU cattle farmers are held to depend on support payments for about 90% of their income);
- for specialised cereal producers there is an oscillation in the ‘share of direct payments … between 40% in good years and 85% in bad years’;
- ‘in case of severe market disturbance, the market safety net…helps stopping the price decline via supply withdrawal’ (2).
- ‘Beyond the negative impact on food security, phasing out the CAP would lead to land abandonment in some regions and concentration in the most productive areas’ (5);
- one of the Joint Research Centre (JRC) scenarios to test CAP reform options found ‘removing the CAP would result in an 18% drop in farm income on average in the EU, threatening the economic viability and attractiveness of rural areas, a sizeable decline in production affecting food security, land abandonment, a decline in permanent grassland and a stronger production intensification, which can lead to more pressure on the environment’ (5).
The EC concludes ‘both direct payments and the market safety net …help to cover (partly) for the consequences of risk event occurrences in EU agriculture’. An additional source of CAP support highlighted by the EC is the ‘specific income support in Areas facing Natural Constraints (ANC)’, which it is held plays ‘an important role in keeping farmers on the land in areas where production is not viable in itself (2).
| The Competitiveness Position of EU Producers The EC recognises that ‘EU production costs are relatively high in some sectors’, with in the wheat and beef sectors average production costs tending to be ‘higher than in other world regions’ (for wheat – Argentina, Canada, Russia and Ukraine and for beef – the Americas, which dominate world markets). In addition ‘for sheep, poultry, milk and maize EU production costs tend to be higher compared to competitors’ (2).The EC also highlights how ‘for several commodities the EU ranges among the pricier markets (e.g. beef, sugar). Consequently, world market prices might appear more favourable for producers in third countries who then might push for higher market shares. Likewise, if the difference exceeds transport costs and remaining import duties, the European market could increasingly become a target market for external suppliers and hence become more challenged domestically’(2). This provides the underlying market context for the implementation of CAP measures and associated trade policies. |
Not surprisingly given the perceived growing vulnerability of EU producers to global market pressures ‘risk management’ is a growing focus of the design and implementation of CAP measures (2).
While acknowledging the productivity improvements which have been made by agricultural producers and processors over the reform period, the EC recognises ‘EU agricultural productivity growth is slowing down – averaging 0.8% annually in 2005-2015 compared with 1% per year in 1995-2005’ (2).
Member States Governments’ Perspectives on the Current Proposed CAP Amendments
Overall the EC acknowledges that in the context of the current reform proposals the main concern of national EU governments is to ‘minimise the changes in support provided to the agricultural sector compared to the previous CAP’. There is a strong desire to ‘limit the impact of the changes on farmers’ income and to maintain the balance between agricultural sectors’ (2).
It is in this context that growing importance is attached by some governments to voluntary coupled support (VCS) payments, in regard to which increased flexibility has recently been introduced. At the time of the discussions on the modification of rules on the deployment of voluntary coupled support the EC warned member state governments that the proposed modifications of the VCS scheme could create problems for the EU in the WTO (see companion epamonitoring.net article ‘Will New Flexibilities in EU Voluntary Coupled Support Payments Provoke a WTO Challenge?’, 24 May 2018). Subsequently the EC has acknowledged that while VCS ‘is currently notified as Blue Box’ such support it is likely to be shortly reclassified as ‘Amber Box’ support, which the WTO deems to distort production and trade.
In addition the EC has acknowledged that the deployment of VCS in some sectors raises questions on the ‘effectiveness of supporting sectors in difficulty, especially with respect to their impact in making these sectors more competitive and less support-dependant’ (2)
The EC acknowledges that many of these challenges faced in the agricultural sector are not exclusive to the EU, with EU farmer faring better than many farmers in other countries ‘where different farm policy choices were made’ (2)
| Comments and Analysis The first question which areas is whether the ‘very conducive’ ‘market environment’ the EC refers to would be quite so conducive to current levels of EU agricultural production if current EU managed trade regimes and systems of agricultural support were not in place.The analysis cited by the EC in its background documentation suggests EU production levels and consequent, trade outcomes would be substantially different in the absence of the comprehensive system of EU policy measures designed to achieve the twin task of insulate EU agricultural producers from the worst effects of global market price developments, while enabling EU agro-food enterprises to capitalise on rapidly growing global demand for agro-food products. While the production and trade effects of EU agricultural support policies are not the same in all sectors, there impact is significant in the dairy sector, the poultry sector and now the sugar sector. These are the sectors where EU policy changes in recent years have had the greatest impact on developing countries in Africa, the Caribbean and the Pacific. It is in specific African countries in specific sectors where the impact of EU production and trade development has been most pronounced. It is against this background that the EC’s assertion in regard to the non-trade distorting nature of EU agricultural support instruments and policies, sits uneasily with the catalogue of important consequences for farmers’ incomes and the maintenance of production levels which the EC attributes to current EU agricultural support instruments. While the use of these instruments may be fully compatible with WTO rules on agricultural support (rules which the EU played a major role in formulating), it stretches credulity to suggest the income and production consequences of the deployment of CAP instruments and associated trade policy measures have minimal trade effects. Clearly given the JPC’s findings under the scenario in which the CAP was simply abolished, moving away from the fundamentals of the CAP policy is not and is never likely to be on the agenda of EU Agricultural Ministers. However there is a need to take steps to address the external trade consequences of the deployment of CAP instruments where the deployment of these CAP policy instruments and associated trade policies undermine the prospects for the structural development of specific agro-food sectors in developing countries. While there will be actions which can be taken in this regard within the evolving EU framework for monitoring agricultural markets and trade developments as part of the EU’s broader market management policies (e.g. through the data collection and analysis which takes place in the various EU agricultural market observatories which have been established), the main area for action will be in the interpretation and application of trade agreements, most notably in the interpretation and application of the EU’s reciprocal preferential trade agreements with ACP countries (see the companion epamonitoring.net article ‘The June 2018 CAP Reforms: Part 3 the Trade Dimensions of the CAP and the ACP’, 17 September 2018). |
Sources:
(1) EC, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) No 1308/2013 establishing a common organisation of the markets in agricultural products’, COM(2018) 394 final/2, ‘1 June 2018
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018PC0394R(01)&from=EN
(2) EC, ‘Modernising and simplifying the CAP: Economic challenges facing EU agriculture’
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/key_policies/documents/eco_background_final_en.pdf
(3) Commission Staff Working Document, ‘Impact assessment ‘ Part 1/3 SWD(2018) 301 final, 1 June 2018
http://ec.europa.eu/transparency/regdoc/rep/10102/2018/EN/SWD-2018-301-F1-EN-MAIN-PART-1.PDF
(4) EC, ‘Proposal for a Regulation of the European Parliament and of the Council establishing rules on support for strategic plans to be drawn up by Member States under the Common agricultural policy (CAP Strategic Plans) and financed by the European Agricultural Guarantee Fund (EAGF) and by the European Agricultural Fund for Rural Development (EAFRD) and repealing Regulation (EU) No 1305/2013 of the European Parliament and of the Council and Regulation (EU) No 1307/2013 of the European Parliament and of the Council’, COM(2018) 392 final
https://eur-lex.europa.eu/resource.html?uri=cellar:aa85fa9a-65a0-11e8-ab9c-01aa75ed71a1.0003.02/DOC_1&format=PDF
(5) Commission Staff Working Document, ‘Impact Assessment’ Part 1/3 SWD(2018) 301 final, 1 June 2018
http://ec.europa.eu/transparency/regdoc/rep/10102/2018/EN/SWD-2018-301-F1-EN-MAIN-PART-1.PDF