A Closer Look at  EU Agricultural Subsidies

Published by: Arbeitsgemeinschaft bäuerliche Landwirtschaft & Germanwatch

Author: Tobias Reichert

March 2006

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Summary

The Common Agricultural Policy (CAP) of the European Union (EU), introduced in 1963, has met all of its original objectives. Yields and productivity of individual farms and the sum total of agricultural production in Europe have all increased dramatically. This has resulted, among other things, in the EU subsidizing surpluses of basic food products for sale on the global market. This not only causes problems in the importing developing countries and conflicts with traditional agricultural exporters, an agricultural model focused on increasing productivity also has negative effects within Europe. It endangers the protection of the environment and the countryside, puts smallholder family farms at risk and thus harms the development of rural areas.

The CAP reforms of 1992 and 2002 were only able to address these problems in a limited manner. One reason for this failure is the fact that the objectives of the CAP were not replaced, but rather extended to include social objectives such as consumer and environmental protection, the support of rural areas and coherency with development policy. The objectives became self-contradictory. When it came to implementation, the groups which profit most from a policy of increased production, large farms and agri-industrial enterprises, were usually able to get their way.

In the agricultural reform of 2003, the implementation of which began in 2005, protecting the status quo is a central theme. The main element of the reform is a decoupling of internal support from production. In most Member States, a Single Farm Payment decoupled from production has been introduced. In this manner, most farms receive almost the same level of support as before the reform, without, however, being bound to the cultivation of a particular agricultural product such as, for example, wheat.

Germany chose a combination model for the implementation of the agricultural reform. This consists of a mixture of (regionally uniform) payments calculated differently for arable land and pastureland as well as some payments based on historical individual entitlements (top up). The latter are to be converted step by step between 2009 and 2013 into a regional (by state) uniform payment. Cross compliance, i.e. the additional requirements to which decoupled payments are bound, intended to hinder environmental damage and help keep land in good agricultural and environmental condition, generally only confirms existing rules. It therefore does little to advance sustainable agriculture.

Although the Single Farm Payment predominately aids a transfer of income to well-off farmers and does little to help reach the many CAP objectives, these payments are, at the present time, slotted to receive three quarters of the EU agricultural budget. The new European Agricultural Fund for Rural Development (EAFRD) must fund  the bulk of its rural development objectives with only a quarter of the funds available for agriculture. Furthermore, modernization and increasing productivity remain EAFRD objectives although both are supported by other means. Not only that, these objectives can lead to further production of surpluses within the EU. In contrast, objectives such as improving the environment and the countryside or supporting rural development are objectives which add to the public good. Despite this, the EAFRD offers no real incentives for the cultivation of land of high natural value or for agri-environmental programs, but rather limits payments to compensation for costs incurred and income foregone.

From a developmental point of view, whether or not the reforms lead to a further dismantling of export subsidies is of utmost importance. EU exports at prices below the price of production, particularly in the grain and milk powder sector, oust (predominantly smallholder) farmers in developing countries from their domestic markets. Previous reforms have led to a reduction of inexpensive exports from the EU, especially of grain and beef. The prognoses for the coming years, however, predict a reversal of this trend. For wheat and coarse grains, increased EU exports are predicted. Whole milk powder exports are expected to remain the same. The decoupling of payments from production has practically no effect on EU exports. The expected increase of cheese exports, on the other hand, is not likely to have much effect on developing countries.

The following analysis demonstrates that the latest reforms will not enable the CAP to adequately address social objectives such as environmental protection or rural development. Neither will it be able to avoid causing problems in other countries, due to a model which is concerned primarily with production.

Changes must be made on many levels if the subsidy system is to consistently support social objectives:

• The transfer of income via direct payments can only be justified when these payments also help meet employment and socio-political objectives. This can be achieved with new and stronger instruments such as binding payments to employment. In this manner, a clearer connection to the goal of rural development can be made.
• The EAFRD must concentrate solely on social objectives: protection of the environment and the countryside, food safety, animal welfare and the support of rural development. State subsidies for modernization can not be justified, as modernization usually goes hand in hand with laying off workers and such payments also act indirectly as export subsidies.
• To reach the objectives named above, the EAFRD must have more funds. Since a raise in the EU agricultural budget is highly unlikely, funds which were originally planned for direct payments must be transferred to the EAFRD.
• No measures taken should discriminate unduly against farmers in other countries, particularly in developing countries. Even a subsidy system built on the above model could, in certain circumstances, lead to products being exported below the true cost of production. The EU should therefore publish data on average production costs to facilitate a comparison with export prices. Furthermore, export companies should introduce levies to ensure that products are not sold at below market prices.
• Farmers from other countries can also be discriminated against when the EU raises food safety standards and only helps EU farmers adapt to the new standards. The EU should therefore help others, especially small export companies in developing countries, adapt to EU standards.