Since that previous post two developments of note have taken place. The Commission published its Communication on EIP-A in February. And this week science ministers gathered in the Competitiveness Council, after long and hard negotiations, gave their backing to a general structure for the Horizon 2020 research programme.

In EU jargon they agreed a ‘partial general approach’ (no kidding!) which is an agreement on the essential elements of a legal act, pending the opinion of the European Parliament and the relevant discussions on the EU’s multi-annual budget. One of the main sticking points was the demand of the new member states for ‘equal access’ and ‘fair conditions for newcomers’ that would put an end to the ‘closed clubs’, by which they mean the dominance of western EU states in winning the bulk of funding.

European Innovation Partnership – Agriculture

The Commission Communication in February presented the conception of the EIP-A but added little to the limited information in the public domain as to exactly how this Innovation Partnership is supposed to work.

The objectives and rationale for the Partnership are repeated. The growing demand for food will put further stress on the environment and natural resource use. Therefore a shift towards a different growth path is needed in order to establish a competitive and sustainable production of food, feed, fibre, biomass and biomaterial. At the same time, the increase in output must go hand in hand with improved economic viability for primary producers who have suffered a declining share of value-added in the food chain over the past decade. Without greater farm profitability, ecological sustainability will become even more challenging.

The existence of a gap between the provision of research results and the application of innovative approaches to farming practice as a justification for the EIP is again underlined. New approaches take too long to arrive on the ground, and the needs of practical farming are not communicated sufficiently to the scientific community. Thus, important innovations are not implemented on the necessary scale, and relevant research fields do not always receive the attention they require.

Targets and priority areas for research

The main novel element in the Communication was the identification of two headline targets for the EIP:
• As an indicator for promoting productivity and efficiency of the agricultural sector, the EIP aims to reverse the recent trend of diminishing productivity gains by 2020.
• As an indicator for the sustainability of agriculture, the EIP aims to secure soil functionality in Europe at a satisfactory level by 2020. Soil functionality encompasses the productive capacity of soils and its key roles in climate change mitigation and adaptation and eco-system stability.

A number of indicative priority areas for research and innovation based on the stakeholder consultation are set out, while making clear that the list should not pre-empt the content of innovation actions on the ground. The areas include:
• Increased agricultural productivity, output, and resource efficiency
• Innovation in support of the bio-based economy
• Biodiversity, ecosystem services, and soil functionality
• Innovative products and services for the integrated supply chain
• Food quality, food safety and healthy lifestyles
These headings broadly overlap with the objectives set out in the proposed Council Decision establishing the specific programme implementing Horizon 2020 published towards the end of last year. The headline targets proposed for the EIP arguably capture only a sub-set of these proposed activities.

The next step in the establishment of the EIP-A is the preparation of a Strategic Implementation Plan; no details are provided as to how this will be done. The main concrete proposal in the Communication is that an EIP network facility will be established under the umbrella of the Rural Development Network. This network should animate activities at Union, national, regional, and local level. It will encourage the establishment of operational groups and inform about the opportunities provided by Union policies.

The Communication notes that “The timely establishment of an EIP network is needed to ensure early information of actors and stakeholders concerning opportunities for innovative action.” However, although the Communication was launched in February, a search of the ERDN website when writing this post today revealed no further information about the EIP network, how it will be initiated or who can join it.

Productivity change

The productivity target for the EIP-A will be measured as ‘total factor productivity’. This measure has solid foundations, but the data requirements to monitor it are demanding and currently only available for a limited number of EU-15 countries. Work on calculating TFP growth is undertaken by the Groningen Growth and Development Project supported by an EU FP7 grant, so one assumes that this will be the data source for the EIP productivity indicator.

The latest information on their website covers TFP growth in the period 1980 through 2007 for the 10 EU-15 countries for which growth accounting could be performed, namely: AUT, BEL, DNK, ESP, FIN, FRA, GER, ITA, NLD & UK. The graph shows TFP growth trends in agriculture as well as the food industry and all industries as calculated by this project (the trends are normalised to base 1995 = 100). It confirms the slow-down in agricultural productivity that the EIP-A sets out to reverse.

The rapid technological development of EU agriculture since 1980 compared to other industries is striking. The slow-down since 1999 could be due to a number of reasons. Reduced investment in agricultural research during the period of structural surpluses in the 1980s and 1990s might be one explanation. The slowdown could also be due to the increasing stringency of environmental, food safety, animal welfare and health regulations with which the sector must comply. The TFP trend for the EU food industry is even more alarming, suggesting that TFP is actually lower today compared to the early 1990s.

There is no doubt that a gap exists between laboratory findings and farm-level uptake. However, whether this gap is due to structural barriers between research and practice, or due to the wide distribution of management abilities among farmers, seems to me unproven. It is hard to disagree with the principles on which the EIP-A is based, but whether it will play an important role in reversing these TFP trends remains unclear.

Photo credit Michael Trolove

A picture of global agricultural protection

A unique feature of MAcMap is to allow a meaningful average level of applied protection worldwide to be computed. The world-wide average tariff applied on agricultural products in 2007 was 15.9% (‘agriculture’ refers to products classified as agricultural by the WTO Agreement on Agriculture). Average tariffs varied (for the countries shown in the graph) from 1.5% for Australia to 60.5% for India. The EU’s average of 14.6% happens to equal the average agricultural tariff for developed countries as a whole. Agricultural tariffs are slightly higher in developing countries, although this is not the case for the least developed countries (countries are classified as developed or developing according to their status at the WTO).

A feature of MAcMap is that it can also calculate the average tariff faced by exporters, taking into account the commodity composition of their exports and preferential schemes from which they may benefit. Australia’s interest in agricultural trade liberalisation is underlined by the fact that, although it applies the lowest tariffs on agricultural imports (though accompanied by strict SPS standards which are also effective at limiting market access), it faces the highest tariffs on its exports for the countries shown in the graph. India is at the other extreme, with very high tariffs on agricultural imports but facing relatively low tariffs on its exports. The EFTA countries also stand out with high import tariffs on average. The EU actually faces higher tariffs on its agricultural exports than it applies on its agricultural imports.

Bound vs applied tariffs

Producing tariff averages of this kind is not straightforward, for a number of reasons. The first decision is whether the tariff average should reflect the bound (maximum) tariffs which appear in a country’s WTO schedule of commitments, or the applied tariffs actually used in practice. Some countries may opt to set their Most Favoured National (MFN) tariffs at rates below their bound tariffs (for example, the EU applies a zero tariff currently on imports of cereals because of the high price of cereals on world markets).

A more common reason for differences between bound and applied rates is the existence of preferential schemes, where a country applies a lower tariff on imports from partners in a free trade agreement or from developing countries. Applied tariffs obtained by weighting the MFN and preferential tariffs by the relative importance of MFN and preferential imports better represent the actual degree of protection enjoyed by domestic farmers.

Converting specific tariffs to ad valorem equivalents

Many agricultural tariffs are specific (that is, set as a fixed amount per tonne or per litre). To permit aggregation they must first be converted into their ad valorem equivalent (that is, expressed as a percentage tariff). To do this, the specific amount must be compared with the underlying value of the imported good.

The value of the imported good is usually calculated from the trade statistics as the unit value obtained by dividing the total value of imports in a particular tariff line by the volume. However, bilateral unit values tend to be very volatile and prone to reporting errors and can only be calculated if a trade flow has taken place. Also, a specific tariff encourages exporters to export higher-quality goods with higher unit values (because a specific tariff is less of an obstacle on a higher-valued good); this would lead to a downward bias if bilateral unit values are used to estimate the AVEs of countries which make more use of this form of tariff protection.

One option to avoid these problems is to use a global average unit value rather than a bilateral or country-specific unit value when converting specific tariffs to their AVEs. However, this misses another link between unit values and quality, namely, that exporting countries specialise in goods of different quality. Developing countries are usually assumed to export goods of lower quality, and thus with lower unit import values. If they are required to pay the same specific tariff as exporters of higher-quality goods, then they face higher AVEs. The MAcMap database uses unit values derived from reference groups made up of exporting countries with similar characteristics to take account of these relevant quality differences.

Treatment of tariff rate quotas

Another area of complexity in arriving at the percentage tariff arises where some imports in a particular tariff line enter under a Tariff Rate Quota (TRQ). A TRQ is distinguished by having two tariffs – an ‘inside’ tariff levied on imports up the ceiling specified in the TRQ, and an ‘outside’ tariff levied on imports beyond the ceiling. Which tariff is used when aggregating this tariff line into the average makes a big difference to the results. This is not a trivial issue in relation to agricultural tariffs. For example, according to the MAcMap database, over 9 per cent of the EU’s agricultural tariff lines were associated with TRQs in 2007, and imports under TRQs accounted for 18 per cent of EU agricultural imports.

The MAcMap procedure is to make use of information on the TRQ’s ‘fill rate’, that is, the relationship between actual imports and the ceiling. When actual imports are well below the ceiling, the ‘inside’ tariff is used, and when actual imports are close to or above the ceiling (apart from cases where the ‘inside’ tariff automatically applies without quantitative restriction), the ‘outside’ rate is used.

Aggregation schemes

Once individual tariffs have been expressed as percentages, they must be aggregated to the country average. Different aggregation methods give different results. The simplest method is to use a simple average, where each tariff line is weighted equally. This method takes no account of the value of trade associated with each tariff line, and is also influenced by the number of tariff lines associated with individual products. Often, for sensitive products with relatively high tariff rates a country will use a finer sub-division with more tariff lines, and this will tend to bias a simple average upwards.

An alternative is an import-weighted average, where the tariff associated with each tariff line is weighted by the value of imports. In principle, this gives more weight to those tariffs which are more important to a country’s trading partners. The measure suffers from a problem known as ‘endogeneity’, in that the higher the tariff, the more restrictive it becomes and the smaller the value of imports associated with it. In the limit, a prohibitively high tariff is associated with zero imports, and thus is excluded in an import-weighted average. Because of the importance of tariff peaks in agricultural tariffs, the import-weighted average will often lie below the simple average for this reason.

The MAcMap database uses an exporter reference group weighting scheme using the same reference groups as for the calculation of unit values. Bilateral applied tariffs are aggregated using weights derived from the exports of a given country toward a group of countries (the reference group) to which the import country belongs, rather than derived from bilateral trade. Since different countries pertaining to the same reference group share common demand features but are likely to have different trade policies, the endogeneity bias is reduced.

Comparison of weighting schemes

The MAcMap publication compares how the calculation of average agricultural tariffs is affected using different weighting schemes. In addition to the simple, import-weighted and MAcMap reference group weighted averages, it also includes averages calculated using the ITC methodology. The ITC aggregation scheme is also based on reference groups, with the same general principles as used in MAcMap, but using eleven reference groups rather than the five in MAcMap. Another important difference is that the ITC computes AVEs at the tariff line level based on bilateral tariff-line unit values (incidentally, this is also the approach agreed for use in the WTO when negotiating tariff reductions in the Doha Round) rather than the exporter reference group approach used in MAcMap.

The theory outlined above would predict that the simple average increases the measure of protection, while the import-weighted average reduces it, with the reference group measure falling somewhere in between. When looking at the pattern of protection across all sectors using different weighting schemes, this ranking generally holds. However, this is not the case for agriculture for reasons that are not immediately clear. Here the simple average returns the lowest average figure. Indeed, the EU average rate of applied tariff protection in agriculture is just 8% using the simple average, compared to the 15% reported using the MAcMap reference group approach.

Using the MAcMap figures, the EU’s protection of its average agricultural sector is the same as for developed countries as a whole. However, using any of the other approaches shows that average agricultural protection in the EU in 2007 was considerably below the average for developed countries as a group.

The unsettling conclusion is that there is no ‘correct’ or unique answer to the question posed at the outset of this post as to what is the average level of EU agricultural protection and how it compares to other countries. This is not a criticism of MAcMap but inherent in the nature of the exercise. It is necessary to remember these caveats when comparisons of agricultural protection across countries are shown.

Photo credit Staxnet

The draft Regulation seeks to establish a much closer linkage between EU cohesion policy and economic governance, on the grounds that sound economic policies are essential to ensure that CSF Funds are spent effectively. So, for example, the Commission may ask a Member State to amend its Partnership Contract to bring it into line with recommendations issued within the framework of the EU’s broad economic or employment guidelines or excessive deficit procedure, and may suspend CSF payments if a Member State fails to do so. In some cases, some or all of a Member State’s CSF payments must be suspended until it has taken effective action to correct macroeconomic imbalances. However, any suspension of payments must be “proportionate and effective” and take into account the economic and social circumstances of the Member State concerned.

The power to suspend payments is complemented by a provision enabling Member States to request an increase of 10% in the EU’s contribution to their CSF programmes if they are experiencing temporary liquidity problems and are receiving assistance from one of the EU’s financial support mechanisms.

The significance of this provision was underlined by the Commission’s move in February 2012 to suspend €495 million of Cohesion Fund commitments in Hungary for 2013 due to the country’s failure to address its excessive government deficit, the first time that it made use of this provision in the Cohesion Fund regulation.

Strengthening macroeconomic conditionality

The proposal is part of a series of steps to strengthen macroeconomic governance both in the eurozone and in the EU as a whole. The Excessive Deficit Procedure (EDP) established in the EU Treaty (Article 126) and spelled out in the Stability and Growth Pact (SGP) is intended to ensure that Member States avoid gross fiscal policy imbalances. The two key reference values are one for the general government deficit (3% of GDP) and one for gross government debt (60% of GDP). The problem was that governments simply ignored these provisions and the EU sanctions were not credible. Currently, 23 out of the 27 EU Member States are subject to an EDP (all except Estonia, Finland, Luxemburg and Sweden).

On 13 December 2011, a new set of rules entered into force which is often referred to as the “six-pack”, as it consists of five regulations and one directive. The new rules affect both the preventive arm of the SGP – the procedures to promote surveillance and coordination of economic policies and ensure that excessive deficits are avoided – and the corrective arm of the pact, the EDP. New enforcement mechanisms, including, in particular, financial disincentives and fines, were drawn up for non-compliant euro-area Member States in order to make the SGP more effective.

The new sanctions begin with a requirement for a non-interest-bearing deposit of 0.2% of GDP from a euro area country that is newly placed in EDP. This can be converted into a fine for persistent offenders who fail to take effective action to correct their excessive deficit. These steps are taken by the so-called “reverse qualified majority” voting procedure, which makes the enforcement of the EDP “semi-automatic”.

The six-pack also created a macroeconomic imbalance procedure to prevent and correct wider macroeconomic imbalances including loss of competitiveness within the EU. This also provides for financial sanctions in the form of a requirement for interest-bearing deposits which can be converted into a fine for eurozone countries.

EU Member States that are not part of the euro area do not face sanctions in the form of a financial deposit or a fine under the six-pack. But non-euro area countries would be affected by the provisions to suspend CSF fund payments.

Including CAP Pillar 1 payments in macroeconomic sanctions

In its June 2010 Communication on enhancing economic policy coordination the Commission had actually gone further. When a member state was subject to the EDF, it proposed greater use of the EU budget to ensure respect of the key macroeconomic conditions of the SGP. In cases of non-compliance with the rules, incentives would be created by suspending or cancelling part of current or future financial appropriations from the EU budget, including CAP Pillar 1 payments.

The Commission was careful to point out that sanctions should not affect end beneficiaries of EU funds but rather payment to Member States or payments for which Member States act as an intermediary.

With regard to the CAP and EFF, a situation in which a reduction of EU spending would lead to a reduction of farmer’s and fisherman’s income would be excluded. Conditionality on payments should therefore target the EU reimbursements to the national budgets only: Member States would have to continue to pay the farm subsidies, but the reimbursement of this expenditure by the EU budget could be (partially) suspended.

This suggestion was supported by the Task Force on Economic Governance set up under the chairmanship of Herman van Rompuy in 2010. It recommended a two-stage approach to the introduction of new enforcement mechanisms. The first stage would focus on eurozone countries and introduce interest-bearing deposits and noninterest- bearing deposits and fines. The second stage would introduce conditionality rules on compliance with the SGP requirements in the relevant regulations on EU expenditures for all EU member states (except the UK which has a Treaty opt-out). The scope should be as broad as possible (i.e. including CAP Pillar 1 payments) and the rules should be introduced at the latest in the context of the next Multi-annual Financial Framework.

Reactions to the Commission’s proposals

However, this proposal to extend macroeconomic conditionality to CAP Pillar 1 payments has not been followed up in the Commission’s legislative proposals. Even its proposal to extend conditionality to Pillar 2 funding along with other CSF funds has been widely criticised.

Some argue that trying to extract further money from countries already in the EDP is counter-productive and likely to fail. An alternative suggestion (if politically unrealistic) might be non-financial sanctions such as temporarily suspending a member state’s voting rights in the Council. Others say that miscreant countries will be punished sufficiently by the financial markets by having to pay higher interest rates on their government bonds.

For eurozone countries, the proposal might be seen as a form of double sanction, as the loss of CSF funds would presumably come on top of the requirement for non-interest-bearing deposits and possibly fines.

For groups like the Committee of the Regions and COMAGRI in its draft opinion on the Commission proposal, the issue is that the main beneficiaries of such projects are local and regional authorities and local communities who themselves have been seriously hit by the financial and economic crisis. Should the suspension option prevail, it is those beneficiaries who would also suffer the repercussions of the interruption of relevant long-term investment programmes.

The Commission’s proposal creates a trade-off between the development objectives of the CSF funds and the need for effective sanctions to encourage good macroeconomic behaviour. If financial sanctions are deemed appropriate, it would seem more sensible to confine them to the revenue side of the EU budget rather than to interrupt the flow of programmed expenditures.

Photo credit EnvironmentBlog

Opponents of sugar quota elimination

The European Committee of Sugar Manufacturers (CEFS) (here and updated here) accepts that quotas will end in the long term, but supports the continuation of the quota system until 2020 rather than 2015. It argues that the EU sugar industry has actively engaged and invested to further improve its competitiveness and efficiency since the 2006 reform of the sugar CMO. It seeks an additional five years to enable the European sugar industry to continue this improvement process and to capitalise on long term infrastructure investments.

They highlight the stability of the strictly regulated EU market, arguing that there can only be losers from the volatility that a liberalised sugar market would entail. They claim that all sugar producing countries in the world have introduced support mechanisms for their domestic industries with the objective of protecting them against the volatility of world sugar markets and improving domestic supply security, and say the EU should do the same. They contend that farmers would no longer be guaranteed beet prices, which would undercut the secured beet supply to sugar processors. They further argue that the resulting increased volatility on the EU sugar market would lead to higher sugar sourcing costs, at the expense of the EU food industry and consumers. The attractiveness of preferential access offered by the EU to Least Developed Countries (LDCs) and African, Caribbean and Pacific developing countries (ACP) would also be reduced without a stable EU sugar CMO.

The International Federation of European Beet Growers (CIBE) also calls for the quota system to be extended at least until 2020 here. It favours retaining the current system of market management which it believes ensures security of supply and allows the EU to honour its trade commitments to developing countries. It argues that removing all supply management tools will increase the volatility and jeopardize the security of sugar supply in the EU.

The beet growers claim that the EU sugar beet sector is nowadays not competitive enough to withstand the competition on highly volatile sugar world markets, and want more time for the investments necessary for the long-term sustainability of the sector. They also highlight the potential for the expansion of the isoglucose sector and the significant substitution of sugar with cereal-based sweeteners. They are further concerned about the weakening of beet contracts with processors in future interprofessional agreements and the abolition of the minimum beet price.

The ACP and LDC cane sugar suppliers oppose the elimination of quotas here. They are of the view that the elimination of sugar quotas as from 2015 disregards the EU market reality, the economic development objectives of the EU’s commitment to their countries as well as the key CAP objective of food security. They believe these proposals seriously jeopardize the EC market balance and will undermine all potential growth of the sugar industries of the ACP/LDCs as a result of a lower priced and more volatile EU sugar market. They constitute a deterrent to ACP and LDC to invest in increased efficiency – which the EU has encouraged with an allocation of €1.2 billion of Accompanying Measures. They also object that insufficient care has been taken to ensure policy coherence as mandated by Article 208 of the Treaty of Lisbon.

ASSUC, the European Association of Sugar Traders, argues here that the EU sugar quota system provides reliable conditions for the effective implementation of trade preferences under the Everything But Arms (EBA) initiative, the European Partnership Agreements (EPA) and Free Trade Agreements. Without quota restrictions, beet sugar producers may be expected to endeavour to maximize their sales within the EU, supplying markets hitherto reserved for preferential imports. The abolition of quotas is likely to encourage further concentration of beet sugar production in the hands of fewer agro-industrial groups. ASSUC therefore supports the maintenance of the quota system for the EU sugar market for as long as necessary to promote and/or defend the above considerations.

The European Sugar Refiners’ Association (ESRA) does not currently have a position on the continuation of sugar production quotas. Their main concern here is more favourable access to cane sugar imports with or without beet sugar quotas.

Supporters of quota elimination

On the other side of the argument, the European Sugar Users Association (CIUS) supports the end of the quota system here. It argues that the EU sugar quota system hampers the functioning of the EU sugar market by restricting sugar supplies, making it particularly difficult for the numerous small food processors to source sugar. Because EU within-quota sugar production covers less than 85 percent of EU needs for food, processors cannot satisfy all demand and prefer to conclude sales contracts with the largest users.

Similarly, the European Starch Industry Association, which produces isoglucose (cereal-based sugar) used in various food and drink applications calls here for the elimination of quotas on the grounds that they artificially limit the production of sugar and isoglucose, severely restricting competition in this sector and preventing these industries from growing. It argues that, with the expected buoyancy in world demand between now and 2020, production of EU beet sugar will increase and the WTO restriction on EU sugar exports would be lifted. Third country imports would still have a place, particularly from the ACP/LDC exporters which would still benefit from the preferential elimination of import duties.

There are also indications of where the policy-makers stand. The European Parliament, in its resolution of June 2011 (based on the Dess report), had already advocated that the 2006 sugar market regime be extended at least to 2020 in its existing form and calls for suitable measures to safeguard sugar production in Europe and to allow the EU sugar sector to improve its competitiveness within a stable framework. It also seems that a majority of sugar producing MS are also lobbying the EU to extend the sugar production quota system for up to five years in order to provide farmers and processors an orderly transition period.

Assessing future market conditions

Part of the reason for the differences in approach lies in the vested interests at stake and that there will be winners and losers from the reform. But some of the differences, for example, in terms of what is likely to happen to the EU market balance and imports, should be amenable to empirical analysis which should help to narrow the boundaries of the debate. Stakeholders obviously have different views on the likely impact of quota elimination on the EU market balance.

The Commission’s analysis in the impact assessment of its legislative proposals (and repeated in its published projections of the EU market balance up to 2020, see my earlier post) shows relatively minor impacts on EU production and imports. These projections have been criticised by industry sources for underestimating the likely growth in production not only from white sugar processors but also of isoglucose.

Additional insights on the future market outlook in the absence of quotas are given in a study produced by the LEI-Wageningen at the end of last year for the Dutch Ministry of Economic Affairs, Agriculture and Innovation. Although mainly oriented to looking at the impact of quota elimination on the Dutch sugar industry, the modelling (undertaken using the well-known CAPRI partial equilibrium model of EU agriculture) covers the EU-27.

Three scenarios are modelled. The baseline assumes the continuation of quotas and current import tariffs until 2020 and additional imports from ACP and LDC preferential exporters. A second, Doha, scenario models the impact of lowering tariffs by 70% while retaining quotas. The third, ‘quota-free’, scenario then considers the elimination of quotas in the context of the Doha scenario of lower import tariffs.

It is not clear why the Dutch steering group for the study took the view at the end of last year that a Doha Round agreement would not only be signed but also fully implemented by 2020. The inclusion of the tariff reduction scenario makes it harder to interpret the impact of quota elimination in the more likely situation where the EU retains its border protection. However, this can be approximated by comparing the results of the ‘Doha without quota’ scenario with the ‘Doha with quota’ scenario in the table below.

Quota elimination is projected to lead to an increase in EU sugar production. Production of sugar would increase (compared to the baseline in 2020) by 14% in the EU-15 relative to the Doha with-quota scenario, by 8% in the EU-10, and by 7% in the EU-2, for an overall production increase of 13% in the EU-27. Production in countries which already produce significant over-quota amounts for industrial use (e.g. France) is not expected to react significantly to quota elimination, apart from Germany where production is expected to increase significantly despite its relatively high current level of out-of-quota production. Most of the production increase comes from countries which produce at or just beyond the quota level currently (e.g. Denmark).

However, lower prices will also stimulate consumption so the impact on net imports is relatively small, expected to be a fall of 12% in the ‘Doha without quota’ scenario compared to the ‘Doha with quota’ scenario. I read these results as supporting the Commission’s view of rather modest impacts on the EU market balance from quota elimination, although it is not clear from the published study what assumptions have been made about isoglucose production.

The intensity of the lobbying shows that the rents which can be extracted from the current managed sugar market by producers and processors are clearly still very attractive even after the 2006 sugar reform.

The UK’s House of Lords Agriculture, Fisheries, Environment and Energy EU Sub-Committee has just announced a follow-up inquiry to their earlier enquiry into the EU Sugar Regime. The enquiry will cover the following issues:
• the abolition of quotas and other market management measures by 2015, and whether there is a case for a transitional period;
the governance of inter-professional agreements;
• the impact on third country producers and potential mitigation that may be required, including why there has been variable disbursement of compensation already made available to mitigate the impact of the earlier reform; and
• the extent to which the EU price reduction has been passed on to consumers.

The UK has traditionally taken a pro-consumer view of agricultural policy, but it is also an important beet producer as well as having a traditional sugar refining business. How the Committee navigates these conflicting interests will throw interesting light on the political economy of further EU sugar reform.

Photo credit Dag Endresen.

The MFF negotiations take place in the General Affairs Council (GAC) attended by member states’ European Ministers or Secretaries of State on the basis of a ‘negotiating box’ paper drawn up by the Danish Presidency. This paper outlines the main elements and options for the MFF negotiations. It is updated as the negotiations move forward, and forms the basis for an agreement of the European Council. Once an agreement is reached, its content feeds into the legislative work on the different acts.

For those familiar with WTO agricultural negotiations, the negotiating box paper is similar to the draft modalities document presented by the Chair of those negotiations, filled with square brackets and alternative formulations for different paragraphs indicating areas of disagreement. The intention is to gradually remove the square brackets and reduce the number of alternative formulations over time as the negotiations proceed. The negotiations are guided by the principle that nothing is agreed until everything is agreed..

The CAP negotiating box

At the April GAC meeting, the Presidency presented the elements of the negotiating box for the CAP Heading 2 in the MFF for the first time. It is interesting to note those elements of the CAP review that the GAC ministers believe fall under their remit as part of the MFF negotiations. This is important because the decision-making process that applies to the MFF (as between the Council and the Parliament) is different to the ordinary legislative procedure that applies to the CAP Regulations.

Nine elements are specifically included. The specific language used in the negotiating box, including square brackets and alternative formulations, provides a good summary of the contentious points in relation to these issues as of April 2012.

Overall level of commitment appropriations for Heading 2, including specific ceilings for direct payments
Level and model for redistribution of direct support – details of convergence across Member States
Capping of support to large farms
Method for financial discipline
Other elements relating to Pillar I
Greening [of direct payments]
Flexibility between pillars
Principles for distribution of rural development support
Co-financing rates for rural development support

In addition, the role to be played by macro-economic conditionality in deciding on the release of EAFRD rural development funds (as well as for the structural and cohesion funds) is included

Member state responses

The Council’s discussion on these elements of the negotiating box (which was held in public) is summarised in the minutes as follows:

Concerning the common agricultural policy, some delegations considered the proposed convergence of direct aids per hectare in terms of scope and timeframe as insufficiently ambitious. Others, however, found it too drastic.

Delegations welcomed the objective of improving the environmental performance of the common agricultural policy but questioned the “greening” proposed by the Commission. Member states considered the use of 30% of direct payments for this as too high and asked for more flexibility.

Opinions were divided on the proposed capping of support to large farms.

Many delegations insisted on the importance of rural development and the criteria for the allocation of support to this policy area.

Concerning the rules governing the five funds under the common strategic framework, some member states stressed the importance of macro-economic conditionality. Others were sceptical about it, unless it was extended to other types of expenditure.

Next steps in the MFF negotiations

29 May 2012 – The General Affairs Council will hold a first discussion on a consolidated version of the negotiating box covering all elements of the MFF negotiating package (the MFF regulation, own resources and sector-specific acts).

From May 2012 onwards: Further regular discussions on the negotiating box in the Council preparatory bodies and at ministerial level

10 and 11 June 2012: Ministers for European Affairs will hold informal discussions on the MFF negotiating package at an informal meeting in Horsens (Denmark)

June 2012: The European Council will discuss the negotiating box at its meeting scheduled for 28 and 29 June

End 2012: planned finalisation of the MFF negotiations

Role of the Parliament

At their meeting on March 20th with the Parliament’s Budget Committee rapporteurs on the MFF regulations, COMAGRI MEPs indicated that Parliament would only take its final position on reform of the EU’s Common Agricultural Policy (CAP) post-2013 once the budget has been decided. However, the COMAGRI rapporteurs will press ahead and prepare their draft opinions probably in June which will then be open for amendment over the summer.

The European Commission has launched several initiatives under the Europe 2020 strategy to boost the green economy. A key aspect of this strategy is the Roadmap for a resource-efficient Europe, which sets out a strategic framework for the efficient use of natural resources in Europe. Other initiatives include the OECD’s horizontal strategy for Green Growth, while the UNEP recently introduced its Green Economy Initiative.

What makes the green growth concept attractive to policy-makers and businesses is the idea that taking account of environmental concerns is not just a burden, a constraint on growth, but can be a source of growth and new jobs. A number of EU member states have made greening the economy and creating new opportunities for green business a growth priority with a strong emphasis on sustainable growth, eco-innovation and cleantech industries.

Green growth in the agriculture and food sectors

While much of the attention to date has been on the energy and transport sectors, agriculture has a central role to play in a green growth strategy. The challenges and opportunities for agriculture were outlined in an OECD report published last year. A major shift in farm policy and practice is needed if a growing world population is to be fed without over-exploiting scarce natural resources or further damaging the environment.

Embarking on a green growth strategy for food and agriculture requires action on a number of fronts:

Eco-innovation to increase resource efficiency and to increase productivity in a sustainable way.
Ensuring well-functioning markets and well-defined property rights to provide the right signals in order to reduce negative externalities and to promote positive ones.
Encouraging more sustainable agricultural systems with less dependence on external inputs including energy, water, chemicals and nutrients.
Modifying consumer demand for high resource-intensive diets and foods
Reducing food waste
Creating new markets for agricultural resources, including renewable energies and carbon sequestration
Promoting early action on adaptation to climate change to minimise threats to ecosystems and food production.

Whether green growth involves an opportunity cost in terms of reduced economic growth is a contested issue. Some argue that the trade-off arises precisely because the cost of environmental protection is not accounted for under the ‘business as usual’ scenario, and therefore in the short run output would be higher than under a green growth trajectory. However, because production practices that deplete and/or degrade the natural resource base needed for future growth are unsustainable, in the long run the situation would be reversed. The stylized figure prepared by the OECD to illustrate possible future trajectories of growth in GDP over time captures this idea.

How do the Commission’s proposals measure up?

The Commission’s legislative proposals for the CAP post-2013 were conceived as a contribution to the Europe 2020 strategy, identifying green growth in the agricultural sector and the rural economy as a way to enhance well-being by pursuing economic growth while preventing environmental degradation.

Thus, one of the three objectives for the CAP set out in the Commission’s Nov 2010 Communication (sustainable management of natural resources and climate action) included the aim “to foster green growth through innovation which requires adopting new technologies, developing new products, changing production processes, and supporting new patterns of demand, notably in the context of the emerging bioeconomy.”

COPA-COGECA has embraced the concept of green growth provided that it integrates environmental protection and the production process in a way which maintains production capacity and contributes to efficiency, productivity and innovation. They criticise the Commission’s mandatory greening proposals as an inefficient way to obtain environmental benefits, as unworkable for smaller farms, as being overly rigid, for increasing farm costs, for restricting production and generally undermining the competitiveness of EU agriculture.

COPA-COGECA proposes to focus green growth measures on resource efficiency, particularly of nutrients and water, carbon sequestration in agricultural soil and biomass, and reduction in GHG emissions. Of course, it wants these measures to be voluntary, with payment financed by the EU budget, and applied uniformly across the EU.

It seems to me that the necessary focus on shifting EU agriculture on to a more sustainable growth trajectory has got lost in the negative reactions to the Commission’s proposals for mandatory greening. In the debates on the nitty-gritty of whether EFAs should be 7% of a farm’s arable area or less, or whether the threshold for exemption from the obligation to diversify crops should be 3 ha or 30 ha, the over-riding need for a step-change in EU systems of agricultural production is in danger of being forgotten.

The level of ambition does not yet seem commensurate with the magnitude of the task.

Picture credit Pat Dalton and used under a Creative Commons licence.

This new proposal raises, as always, several new questions. First, if participation of agri-environment programmes would qualify for the greening payment, farmers might result in a double funding as the same activity would be supported from both pillars. Second, this suggests that agri-environment programmes provide us the same public goods as the new requirements would do and if so, I wonder who and on what basis would evaluate this argument. Third, different member states have different agri-environment schemes so it is pretty sure that the new proposals create an unequal system among farmers throughout Europe which is totally against the stated ‘equivalence in greening measures’ principle. Fourth, these proposals would combine the logic of encouragement (agri-environmental programmes) and that of punishment (mandatory greening requirements), the outcome of which is unclear.

However, most stakeholders (mainly farmer’s unions, of course) are happy with these changes and propose further steps to cancel the greening requirements on the basis of the one-size-fits-all approach.  Such further steps would include the wider ‘menu’ option, mainly proposed by the UK, but now it seems to have lost ground on the basis that it would be hard to implement. Anyway, the EP’s COMAGRI will vote on the proposal in the middle of June, followed by a plenary vote in July, while the position of the Council is expected in the autumn.

On the whole, everything is like it has been constructed. After testing the initial reactions to the official proposals, the EC now washes her hands and says that she wanted tougher reform but the majority is against this. The Commission is playing her role well in the European theatre and nothing important seems to change (in this regard) in the next programming period.

One of the main criticisms from member states has been the inflexibility of the proposals which are designed in a ‘one size fits all’ manner (for example, see the recent speech by UK Minister Caroline Spelman on the Commission’s greening proposals). Member states are seeking greater flexibility in the greening practices to be implemented, either in the form of a menu approach or through automatic qualification of farms following approved management practices as in organic farming, the so-called ‘green by definition’ approach. The inconsistency between wanting a flexible greening scheme and retaining the green payment in Pillar 1 of the CAP has yet to sink in for many people.

Luxembourg has tabled a paper at the Agricultural Council which would introduce greater flexibility into Pillar 1 greening but which has been heavily criticised by Birdlife Europe as making CAP greening meaningless. I will review this paper in a later post.

New IEEP report

In the meantime, important insights into this debate can be gained from a new report by the Institute for European Environmental Policy on Delivering environmental benefits through entry-level agri-environment schemes (AES) in the EU. The report investigates the design and implementation of entry-level agri-environment schemes within the EU-27 Rural Development Programmes (RDPs) for 2007-13. The intention is to show how experience of current schemes could help to inform the process of designing the 2014 agri-environment programmes in different ways.

The report comes in two parts. The first part creates a typology of management actions drawn from an analysis of all 88 RDPs in the EU-27 which are, in turn, linked to nine EU-wide environmental objectives. This was an immense task in itself as it involved translating and collating the detailed scheme regulations in all RDPs in all of the EU’s national languages into a single Excel database.

What the analysis underscores is the diversity of the different types of entry-level management actions chosen by member states (and regions) across the EU and the variety of ways in which these are grouped within AES.

The second part uses case studies of selected agri-environment schemes in 10 RDPs from seven member states to investigate in more detail the relationship between the ‘reference level’ (those management actions mandated by legislation or good agricultural and environmental condition (GAEC) standards which a farmer must undertake without compensation), the structure of entry-level schemes, payment rates and uptake. The ways in which the design, revision and improvement of entry-level schemes are undertaken are also documented, as well as the role of farmer support networks and the effect that participation in entry-level AES has on farmers’ attitudes to the environment.

Great diversity in management actions

There is no formal definition or distinction between entry-level and higher-level AES in the EU. Entry-level schemes are described in the report as being fairly simple management achievable by the majority of farmers without major change to their existing farming systems; often relatively close to the environmental reference level which forms the baseline for agri-environment payments under the relevant legislation; and accessible through a non-competitive application and approval process which is largely administrative.

The significance of the focus on entry-level schemes is that the management actions are close to the ‘simple, generalisable’ measures that the Commission has proposed for the Pillar 1 green payment. But there the similarities end. The implementation of entry-level AES across the EU could not be more different from the Commission’s greening proposal than night from day.

Thus the report identifies a total of 63 management actions which it groups into 15 broader categories where the types of action are similar, or share a common focus or aim. For example, limits to application of fertiliser, plant protection products or lime were grouped under the category of input management. All the 63 actions are listed in the box, in descending order of frequency of occurrence of the categories within AES.

There is considerable variation in both the number and type of management actions found with AES in different RDPs. Fewer than five of the possible 63 different types of management actions are included in some regions compared to more than 25 in others, with an average of 15 per RDP.

The management of grass and semi-natural forage is the most commonly occurring category, found in 77 of the 81 RDPs in continental Europe. It is also the category that covers most individual types of actions, 16 in total, including requirements to maintain areas of permanent pasture, upper and lower limits to grazing intensity, restrictions on burning of vegetation, as well as wildlife-friendly cutting regimes and hay making.

The differences in detail in the management actions required across RDPs is striking. Grazing regimes for livestock are the most common type of management actions within the category, closely followed by cutting regimes. The report describes these differences as follows:

Grazing regimes typically specify limits for stocking densities, seasons at which livestock are allowed to graze and, in some cases, define the type of livestock to be used14. Stocking densities may be set as an upper limit, or as a range with a lower limit also defined. Minimum densities vary from 0.1 livestock units per hectare (LU/ha) in Andalucía, Spain to 1LU/ha in Piedmont, Italy with maximum allowed densities ranging from 1LU/ha in Andalucía, Spain up to 2.5LU/ha in Hamburg, Germany (this figure is particularly high, and is just for seasonal grazing between July and November). Two livestock units per hectare is the more commonly specified maximum, present in 12 RDPs. This range is perhaps unsurprising given the different climates, soil types and seasonal variations across the EU, which means that different types of land will have different environmental carrying capacities. For the same reasons cutting regimes can have a range of requirements, including the number and orientation of cuts (such as from the centre to edge of the field), the earliest date at which mowing starts (often in mid June), how much of the parcel can be cut at any one time, the minimum height of sward to be left and the removal of the cut material.

Within agri-environment schemes, grazing regimes are invariably delivered as part of packages that include other actions from this category (such as maintenance of permanent pasture, scrub control, no burning) and also from other categories (for example limits to fertilisers and other inputs, to tillage and other mechanical processes that might affect soil structure). Cutting and grazing regimes may be packaged together or delivered separately, and a single RDP may have more than one package for the management of grassland and semi-natural forage.

Lessons for greening the CAP

What we learn from this analysis is that member states and regions, when tasked with designing agri-environment schemes to deliver environmental benefits, come up with very different solutions in terms of the management actions required of farmers depending on the climatic, physical, structural and agronomic characteristics of their areas. Furthermore, the 10 case studies show that there is a dynamic relationship between the actions that are included as part of GAEC and those actions for which farmers can be compensated as part of entry-level AES. Member states and regions make regular adjustments to the former which then have knock-on effects on the latter (given that the reference level or baseline on which the entry-level AES build is now changed).

The difference with the ‘one size fits all’ approach proposed by the Commission for its Pillar 1 green payment could not be starker.

Of course, making use of flexibility to address local environmental issues in the most appropriate way comes at the cost of a uniform treatment of farmers across the EU. A management action which is part of GAEC standards in one country/region may be eligible for compensation as part of an entry-level AES in another. Farm organisations complain about this diversity of treatment, and member states criticise the absence of a level playing field. But environmental pressures differ from one region to another. Equal treatment does not necessarily mean equitable or cost-effective treatment in this case.

Another objection is that flexibility in some cases may simply mean that some member states have designed schemes which make few environmental demands on farmers in return for payment. This underlines the important role for the Commission in auditing schemes and ensuring a broadly equivalent level of environmental ambition.

There are limits to the IEEP study which are recognised in the report. In particular, the study does not attempt to measure or evaluate the environmental impact of the management actions in entry-level AES. But it should cause decision-makers to pause and reflect on how best to really use the CAP budget to deliver environmental benefits.

Image downloaded from http://www.flickr.com/photos/13847552@N03/3906560447/ and used under a Creative Commons licence

First of all, this proposal will generate a ‘golden ticket’ system in Europe where 2011 entitlements will become the most valuable asset a farmer can imagine. This will cause previous agreements between landowners and tenants to be reviewed as well as would cause several difficulties if farmer business changes between May 2011 and the date the new scheme is launched. It also appears that current proposals do not allow the ‘golden ticket’ to revert to the landlord on the termination of his tenancy, thereby creating extreme hardships in changing tenants or getting back entitlements.

As the recent report of the European Court of Auditors puts it: “Non-active landowners would indirectly benefit from EU aid for the entire new programming period. The Court considers that this risk is not entirely excluded, for example if entitlements were transferred back to the landowner in 2011.” Consequently, land transactions currently being negotiated will be influenced by the uncertainty of the reform, which is exactly what happened in the run-up to the 2005 reforms, putting great strain on landlord and tenant relationships in that period. Moreover, it is also possible that the 2011 reference year may be changed to 2012 which farmers must bear in mind when entering into new arrangements this year. The use of a reference year might also create barriers to new entrants.

However, one should clearly see that the BPS does little or nothing to solve the fundamental problem of direct payments: they are ineffective, if not actually counterproductive, in the long run for a number of reasons. The current system is a complicated and misguided confusion of income support, compensation for previous supported price reductions and baseline environmental management payments through cross compliance, resulting in a clearly unequal system derived from historical rights. However, the CAP policy process and mechanisms are dependent on the idea of compensation and the EU seems to find a reason again to justify continued direct payments and thereby complicate the anyway complex system.

This post was written by Attila Jambor.

The ageing of the agricultural population results from a combination of two things: a reduced rate of entry by new young recruits, and a reduced rate of retirement or exit by older farmers. This is taking place in the context of a long term reduction in the agricultural labour force in EU countries.

There is no doubt that the average age of farmers is increasing steadily. Unfortunately, the age of farm holder tabulations from the 2010 Agricultural Census have not yet been released by Eurostat, so the latest data we have are still from 2007. In 2007, 31% of holders of agricultural holdings in the EU-15 were 65 or older (28% in 1997 and 24% in 1990). Note that all the percentages in this post refer to the EU-15 as age distribution figures for the new member states are not available for the longer time period.

The proportion of farm holders over 55 has remained fairly constant over this period (54% in 1990, 55% in 1997 and 55% in 2007). However, while just 8% of holders were younger than 35 in 1990 and 1997, this proportion had dropped to 5% by 2007. Trends over the longer period for the EU-15 are shown in Figure 1.

Note: The figures are not fully comparable over the period. Figures for Belgium are not available for 1990 and for Austria, Finland and Sweden for 1990 and 1993. Germany is only included (including the former Eastern Germany) from 2000 on. Around 5% of holdings were unassigned in 2000 and these have been excluded in calculating the proportions. Source: Eurostat ef_ov_kvage

It is known that younger farmers are more likely to be found on larger farms where the prospects for making a viable living are greater. Figure 2 shows the age distribution of holders on farms over 20 ha in the EU-15 (I have chosen 20 ha as an arbitrary threshold to make a rough distinction between smaller and larger farms). However, while the absolute figures are somewhat better, the trends are the same.

Farm holders over 65 made up 10% of total farm holders on farms over 20 ha in the EU-15 in 1990 and 13% in 2007, although farm holders over 55 on these larger farms have maintained a roughly constant share (37% in 1990, 34% in 1997 and 36% in 2007). Farm holders under 35 made up 14% of the total in 1990, 13% in 1997 and 9% in 2007).

Note: The figures are not fully comparable over the period. Figures for Belgium are not available for 1990 and for Austria, Finland and Sweden for 1990 and 1993. Germany is only included (including the former Eastern Germany) from 2000 on. Around 5% of holdings were unassigned in 2000 and these have been excluded in calculating the proportions. Source: Eurostat ef_ov_kvage

A feature of the age cohorts is that, in each decade, the numbers of farm holders in the 45-54 age group is greater than in the 35-44 age group in the previous decade, indicating that there are significantly more net entrants to farming in the older age group than net exits. These may be relatives assisting on farms who take over the farm management on the death of the previous holder, but they may also be family members who now live and work in urban areas but who decide to hold on to the family holding either as a part-time farm or as a second home after the death of their parents. There may also be small numbers of ‘hobby farmers’ with an urban background with sufficient means to acquire a farm as a rural residence included in these figures particularly in the countries of northern Europe. It is only in the 55-64 age cohort that exits begin to (just about) exceed new entrants.

Another way of looking at the figures is to ask whether the area of land controlled by older farmers is increasing. Evidence from the US for the period 1988 to 1999 suggested that the share of farm assets controlled by the over-65’s increased significantly (from 17% to 34%, see Gale 2003). This does not appear to be the case in the EU-15 where the share of UAA farmed by the over-65’s was 12% in 1990, 14% in 1997 and 14% in 2007 (the corresponding shares for the over-55’s are 39%, 36% and 37% respectively). On the other hand, the share of land farmed by the under-35’s has fallen from 13% in 1990 and 13% in 1997 to 8% in 2007 (see Figure 3).

Note: The figures are not fully comparable over the period. Figures for Belgium are not available for 1990 and for Austria, Finland and Sweden for 1990 and 1993. Germany is only included (including the former Eastern Germany) from 2000 on. Around 5% of holdings were unassigned in 2000 and these have been excluded in calculating the proportions. Source: Eurostat ef_ov_kvage

These trends can be explained by two main fundamental forces. First, the relatively low returns in farming compared to other occupations, combined with the disamenities of living in the more remote rural areas, mean that a career in farming has not been attractive to the younger generation. Second, farmers like everyone else are living longer. And because there are fewer exit opportunities for older farmers for whom their farm is also their home, the fact that they are living longer means that the transfer to the next generation is now taking place later than it did before.

Vision statements, commission reports and scenario studies in various EU countries lament the ageing of EU farm holders and call for policy interventions to counter this trend (see, for example, the 2008 European Parliament resolution on The future for young farmers under the ongoing reform of the CAP). However, the evidence presented above suggests that what we observe is a slow upward shift in the age distribution which can be explained by general social trends (longer schooling periods and longer longevity) rather than any specific worsening of the generational transfer problem in agriculture as such.

One of the innovations in the Commission’s legislative proposals for the CAP post-2013 is an overhaul of the scheme of installation aid for young farmers and the proposed introduction of a compulsory additional direct payment in Pillar 1 for young farmers receiving the basic payment. However, independent analyses as well as evaluations of previous versions of young farmer schemes suggest that these are hard to justify on a value for money basis. Contrary to conventional wisdom, age is not necessarily related in a negative way to higher productivity.

© Photograph copyright Richard Law and licensed for reuse under a Creative Commons Licence.