Rhein on Energy and Climate

World agricultural prices have reached record levels in early 2008. They are roughly 65 percent higher than five years ago, when the main lines of the present agricultural policy underwent the last revision.

Both OECD and FAO expect agricultural prices to stay at this high level and even keep rising during the next decade.

After five decades of agricultural surpluses scarcity has entered the stage. This reversal of fortunes is due to four principal factors, none of which is likely to go away in the foreseeable future.

  • world population continues to rise at a rate of 70 million human beings every year, who need to be properly fed and clothed.
  • the emerging countries, above all China and India, demand an improved diet, containing more meat. This has profound repercussions on the grain market, as it takes 2-3 kg of grains to produce one kg of meat.
  • biofuels absorb a growing share of the production of maize, cane sugar, palm oil and rape seed, especially in the USA.
  • climate change starts to impact on agricultural production through more frequent and even persistent droughts or floods in major producer countries like Australia and China.

The high world market prices for major agricultural crops have substantially improved the economic situation of farmers world-wide, while making life even tougher for the masses of poor city dwellers in Africa, Latin America and Asia.
As a consequence of higher world market prices traditional import duties have lost their relevance. Several countries like India have replaced them by duties and restrictions on agricultural exports in order to protect their poor against the high prices.

EU farmers, while continuing to receive the direct income payments, have fully benefited from this boom through higher prices and higher production, as they are no longer obliged to leave up 10 percent of their land idle.
But they benefited unevenly, grain farmers most, producers of wine, fruits and vegetables and meat least.

The preceding analysis raises a central issue that is being totally ignored in the 2008-09 Review of the Common Agricultural Policy: are direct income payments for EU farmers still justified in the light of the dramatic reversal of the world market for agricultural crops?

The direct income payments were introduced in 1992 as the key element of the “Mc Sherry reform” in order to compensate grain farmers for the lowering of EU grain prices that was necessary to get rid of the recurrent surplus production. Farmers should get used to operating in a market environment and enjoy the freedom to produce whatever they liked.
Thanks to the radically improved market situation this justification has become obsolete. Today, nobody would dream of introducing direct income support.
Payments for market intervention, storage, export subsidies etc. would no longer be required in the new market situation, so that the EU farm budget would be left with no more than € 12 billion for rural development.

The Commission has made very timid proposals for improving the nature of the expenditures. It proposes to transfer part of the direct payments to rural development operations and to reduce payments to big farmers. These measures are due to become effective for 2009-13.

But the debate should go beyond these welcome though marginal amendments and focus on the fate of direct income payments in the Financial Perspectives 2014-20.
Is there any good reason for paying the operators in any specific economic sector a state revenue? Is agriculture so precious for the European society to pay every farmer € 300-400 per ha every year, independently of the commercial income? Why not pay scientists, doctors or teachers a similar annual stipend in recognition of their valuable services for society?

The farming lobby has been very innovative with all sorts of justifications, from food security to the protection of the environment. And politicians have ‘bought’ these arguments without a proper public debate. Agricultural policy has been and continues to be a “chasse gardée” of the bureaucracy. Agricultural expenditures have never been subject to a rigorous scrutiny by the European Parliament. This will happen for the first time for the budget 2010 if the Lisbon Treaty enters into force early next year.

It will be up for the European Parliament and the European Council to define the budgetary priorities: Should the EU really continue to provide an annual amount of € 45 billion for direct income payments of farmers while setting aside just € 10 billion per year for research and innovation, on which Europe’s future depends?

Whatever the outcome of this fundamental debate, direct income payments to farmers in all 27 member countries are not sustainable at present levels. This would imply a substantial increase of overall budget expenditures for agriculture, in order to lift payments in the 12 new member states to the levels of the EU 15 at the end of the transitional period.

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