Genuine CAP reforms or a  three-card game?

by Chakravarthi Raghavan

GENEVA: The European Union Agriculture Ministers agreed after a night-long meeting in Luxembourg on 25 June on a package of ‘reforms’ to the Common Agricultural Policy that was hailed by the EU Farm Commissioner as a “fundamental reform” but which may prove to be much less than made out by merely shifting the way of domestic support, without any actual cuts, and making the support and the export subsidy/competition much less transparent.

While the ‘reform’ of decoupling support to farmers from production, through a so-called “single farm support” to replace most of the current premia paid to farmers, will theoretically enter into force from 2005, but with some members opting for a transition period stretching till 2007, the announced plans seem to contain many exceptions and loopholes (that member states could use) in keeping payments partially linked to production, under the garb of keeping farms in production and not abandoned.

In any event, the French-German deal in October 2002 (struck at the level of President Chirac and Chancellor Schroeder) freezes overall EU support for agriculture for 2007-2013 at 2006 levels. Between now and 2006, the EU will also be absorbing 10 new members (who, to begin with, may not get the same level of support as the older members but will get some aid) and estimates are that the EU farm aid budget will increase slightly between 2004 and 2006 from the existing amount of about 43 billion euros annually.

And while the French are being presented as the villains holding up and vetoing CAP reforms - and they are doing plenty of this - given the non-transparent way (even from parliaments of member countries or the European Parliament) the EU and its Council of Ministers and negotiating and decision-making process works, and if the past be any guide to the future, what the EC says and presents at the WTO will over time turn out to be very different, and developing countries will find themselves worse off than before.

At a luncheon meeting with journalists on 26 June, WTO Director-General, Dr. Supachai Panitchpakdi, welcomed the agreement reached at Luxembourg, and said it was “work well done, although we need to be able to analyze what is the meaning of all this.” The decoupling of direct payments alone is very valuable, Supachai added, but he was unable to say how members will react to this. He however thought that as a result of the EU action, at the WTO there would be some movement on agriculture, but maybe not in all areas. He thought that this could lead to speeding up discussions and negotiations to move the agriculture agenda forward, but “how far, we can’t tell yet.”

On whether the CAP reform will be sufficient, Supachai said that for one thing the three boxes (green, blue and amber) into which domestic farm support is ‘classified’ will be looked at by the WTO members. But at least “it gives life to the negotiations ... a transfusion into the body of the negotiations”, and creates discussions on areas like domestic support, among others.

Have the Europeans done their share in terms of the CAP reforms? Supachai could only say that this was an area that “will have to be looked at in the negotiations among the WTO members.” He insisted however that the EU has “done a great deal” to move the process forward, but that the level of ambition in the WTO agriculture negotiations is high; and therefore it is up to members to scrutinize the consequences. For the moment, this is a substantive achievement, Supachai reiterated, but he could not say how far this was in respect of the current agriculture negotiations. However, in his view, there will be “certainly significant movement” on agriculture and this could spur countries to move on other issues like non-agricultural market access and services.

No reduction

In contrast to Supachai’s view, Ms. Aileen Kwa, a Geneva-based policy analyst for Focus on the Global South, a Bangkok-headquartered civil society group, cautioned developing countries against being “fooled” by the announced reforms, and said the EU subsidy levels to farmers were not being reduced but merely being shifted among different support programmes.

Though theoretically the reforms, decoupling payments from production but linked to historical levels, should lead to reduction in production, and hence support needed to dump surpluses on world markets, such a theoretical outcome has not taken place, Kwa said. Even now, since the 1990s, the EC has been decoupling part of the subsidy in cereals, with the EC domestic intervention prices set nearer world prices and 50% below the previous intervention price, while channelling payments to farmers directly. But this has not led to reduced production and, according to a study by the CTA, the ACP-EU Technical Centre for Agricultural and Rural Cooperation, EU cereal production had increased by 25% instead of contracting, since overall subsidy levels had increased. With farming being a part of family history for many farmers, they do not abandon farms and move to the city and accept a different way of life and culture. Most European farmers stick to the farms as long as possible, and it does not matter to the farmer under what label he or she gets paid.

However, says Kwa, the price and trade effects of CAP instruments are less transparent, and developing countries will face more price-competitive but no less subsidized EU agricultural and processed farm products on their markets. While export subsidies so far have been at least transparent, it will now be much more difficult for the EU’s trading partners among developing countries to ascertain the level of support (and dumping) on their markets.

For countries with liberal trading arrangements with the EU - like the over 70 African, Caribbean and Pacific (ACP) countries with which the EU is currently negotiating reciprocal trade agreements - ‘competitively’ priced EU products will be flooding their markets, and the ACP countries will effectively become the EU’s dumping ground.

An impressive public relations mechanism is being set into full gear, and developing-country members will be told that liberalization on the part of Europe is now underway and the developing countries will be asked to significantly lower their tariff levels. Agricultural liberalization under the Uruguay Round has had detrimental impacts on developing countries, and this one will “further wipe out small farmers and exacerbate the already acute crisis of rural poverty, unemployment and hunger”, Kwa said. While only 5% of the EU population are farmers, this is not the case in the developing world, where 75% are farmers in China, 77% in Kenya, 67% in India and 82% in Senegal.

The EU Trade Commissioner will now use this opportunity presented by the CAP ‘reforms’ to press for accelerated liberalization in services sectors as well as expand the remit of the WTO for the benefit of EU corporations and launch new negotiations on investment, competition, transparency in government procurement and trade facilitation. “If the Ministers from the developing world, under strong political and economic pressures, cave in (at Cancun), the South can kiss goodbye to its last bastion of domestic policy space,” the civil society activist said.

Key elements

As presented by the EU itself, the key elements of the CAP reforms now agreed provide for:

   l  a single farm payment for EU farmers, independent from production; however, “limited” coupled payments will be maintained to avoid abandonment of production, with this payment linked to “respect” for environmental, food safety, animal and plant health and animal welfare standards, as well as keeping farmland in good agricultural and environmental condition;

   l  a strengthened rural development policy with more EU money, new measures to promote the environment, quality and animal welfare and help farmers meet EU production standards starting in 2005;

   l  reduction (modulation) in direct payments  for  bigger  farms to finance the new rural development policy. The published details now available in the EU reform plan/document show that for farms with up to 5,000 euros of direct payments a year now, there will be no modulation until 2013, while payments to those now getting more than an annual 5,000 euros will see a 3% cut in 2005, 4% in 2006, 5% in 2007 and from 2008 to 2013;

   l  the intervention price for cereals will be maintained at current levels of 63 euros per tonne, with a 50% reduction in the existing seasonal correction for the intervention price; rye will be excluded from the intervention system; and in member states where rye production is higher than 5% of total cereal production and 50% of the EU’s total rye production, 90% of the modulation price will remain in the country, and at least 10% of this money to be spent in rye-producing regions.

For the beef sector, member states may decide to retain up to 100% of the present suckler cow premium and 40% of the slaughter premium or retain either up to 100% of slaughter premium or alternatively up to 75% of special male premium.

A maximum of 50% of the sheep and goat premia including the supplementary premium in less favoured areas can remain linked to production.

Drying aid for cereals and direct payments in outermost regions and Aegean Islands may remain tied to production if member states wish so.

Dairy payments will be included in the single farm payments from 2008, once the dairy reform has been fully implemented. Member states may introduce the system earlier.

There are also some details published about the supplement paid for protein crops, aid of 45 euros per hectare for “energy crops” for areas covered by production contracts between farmers and processing industry, the supplement for durum wheat to be paid independently from production.

However, member states may keep 40% tied to production - 304.25 euros per hectare in 2004, 290.0 euros per hectare in 2005 and 285 euros per hectare in 2006 (and included in single farm payments). A new premium will be provided to improve quality of durum wheat for semolina and pasta production.

Starch potato production will receive a direct payment of 110.54 euros per tonne of starch, with 40% of this included in the single farm payment; the remainder will be maintained as a crop specific payment for starch potatoes, and the minimum price will be maintained as will be the production refunds for starch.

For rice, there will be a one-step reduction in the intervention price by 50% to 150 euros per tonne, and intervention will be limited to 75,000 tonnes a year; but the current direct aid will increase from 52 euros per tonne to 177 euros per tonne.

There are to be “asymmetric” price cuts in the milk sector, with the intervention price for butter reduced by 25% (-7% in 2004-2006 and -4% in 2007); for skimmed milk powder, prices will be cut by 15% in 5% steps over three years. Intervention purchases of butter will be suspended above 70,000 tonnes limit in 2004, and falling to 30,000 tonnes from 2007. Above these limits, purchases will be by tender procedures, with target price for milk abolished.

As for reforms for olive oil, tobacco and cotton sectors, the Commission will submit in autumn of 2003 a communication on them, to be followed by legal pro- posals, and provide a longer-term perspective in these sectors.