The Cost of Protection in Agriculture

The cost of protection in agriculture: the case of the European Union Completed by University of Outline 1. Abstract 2. Introduction 3. Literature review 4. Data and methodology 5. Main issues within the EU community a. Problems in agriculture b. Future of the EU agriculture 6. Summary and conclusions 7. References Abstract Overall, the European Union’s expenditures constitute more than $50 billion a year on supporting farmers. Most of this money is intended for purchasing butter, beef, milk powder, as well as wheat, storing it and eventually selling it at the reduced prices to Easter European countries and the Third World, or else on paying traders to export it at significantly reduced rates. The sole aim of this activity is to keep farmers’ prices high. However, this official market-holding makes consumers pay at least a third more for their food than they would in a free market. This part of the modern agricultural policy is approximated to cost the EU’s buyers more than $100 billion a year (CAP Reform 2002). But why if such policies cost so much the country and the public, are they accepted by the EU? This paper aims to explain why the EU operates such actually illogical policies for the agricultural industry. This work’s objective is to outline and explain the seemingly irrational policies of agriculture protection within the EU community. The paper employs the method or scholarly works and publications’ review, which is performed with the purpose of developing a solid understanding of the EU’s spending on agriculture as well as particular reasons for incurring such costs. The conclusion drawn is based on the findings of the various EU Commissions and scholars accessing the agricultural protection in the EU. Introduction This paper attempts to outline, define and analyze the particular attitudes towards agricultural policy within the EU community as well as explain the reasons for the EU’s vast expenditures on supporting the agricultural sector of the economy. The European Union’s notorious agricultural policy, despite quite radical reforms in recent years, continues its over-production and over-spending. Many independent observers ask: why? Why is it that politicians spend so much money and time on farmers, when in most European countries they have stopped subsidising steel mills, coal mines and manufacturing industry? Why should a proportion of the population representing less than 6 per cent of the workforce and making less than 2 per cent of the EU’s economic output absorb such excessive funds, so much political and governmental time and (in such a highly organised industrial society) so often be in the political spotlight? What other industry has its own government departments, its own Directorate General in the European Commission and its own Council of Ministers? (CAP Reform 2002) Agriculture is unique in economies. Farm sectors comprise highly competitive businessmen, producing a relatively homogeneous commodity for sale in a market with numerous price and quality conscious consumers. In other words, agriculture would appear to be the ideal industry in which to realise a perfect competitive market to the benefit of both producers and consumers . Considering the potential for pervasive competition and lack of market dominance by any one producer, one would think agriculture is the least likely sector of the economy to find extensive government intervention. The answer to such questions is (unsurprisingly) multipart and has deep historical and frequently emotional roots. There are two main justifications for supporting farm markets and they are closely linked and interlocking. The demand for food in developed countries is more or less static: unlike demand for motor cars, consumption of food does not increase if its price falls as productivity and production increases (European Agriculture entering the 21st century 2003). Price does not therefore balance consumption with too often increasing production. Second, because agricultural production is determined to a great extent by climatic and biological factors, beyond human control, production fluctuates for reasons not affected by the working of the market. These variations can cause large increases or reductions in production which the farmer cannot predict; these in turn can create price slumps and booms which are ruinous to farmers and damaging to consumers. Governments therefore intervene to iron out uncontrollable fluctuations (European Agriculture entering the 21st century 2003). These two reasons would not on their own be enough to justify the vast panoply of support and expense devoted to agriculture. What makes governments worry most about farmers is that they produce the single most important basic commodity of vital importance to human survival: food. As the French noblesse learned to their cost in the eighteenth century and Boris Yeltsins Russian government understands only too well today, maintenance of adequate food supplies is essential to human wellbeing and therefore to political stability (Holt and others 2003, 23-28). Almost all governments therefore seek food market policies which will keep farmers producing, maintain adequate food supplies and ensure stable food prices. The only way that governments know how to achieve these objectives is to intervene in the market with the intention of maintaining steady prices and therefore also, it is hoped, adequate farm income levels . To avoid the traditional cycle of shortages, soaring prices, over-production, bankrupt farmers and recurring shortage, governments have sought to establish support policies that iron out the peaks and troughs by giving farmers a steady price for their products. Until the international agricultural revolution which followed the Second World War, world markets were just as unstable as individual national markets, making it necessary to protect farmers from the price-depressing effects of cheap imports. In theory, this should have resulted in the matching of production to consumption and have ensured reasonable prices to consumers. Now there is no longer so great a need for nations to protect their agriculture industries in order to secure food supplies; agricultural technology has ensured that farming has become a business like any other: a relative handful of people can produce all of a country’s food supply.

The spread of new technology around the world has also largely ironed out fluctuations in output. Even as important an event as the 1988 North American drought caused little more than a blip in the upward trend of world food production. Despite this, agriculture still manages to maintain its right to special treatment. In most developed countries agricultural politics and agricultural politicians manage to maintain a disproportionately large role in the political system. Other political considerations have too, over the years, obscured and complicated the relatively simple objective of maintaining food supplies. Aided and abetted by farmers’ organisations, governments have pursued other objectives via their farm price-support policies: preservation of the country-side and the maintenance of rural communities are the most obvious (European Agriculture entering the 21st century 2003). These often justifiable objectives have also become overlaid with emotional and outdated motives like ‘maintenance of the peasantry as the backbone of the nation’ (nineteenth-century Prussia) and preservation of ‘the rural patrimony’ (twentieth-century France). Even in allegedly rational and pragmatic Britain and the United States there is still an apparently irrational view that farmers are somehow different and should not be subject, unprotected, to the same economic forces that affect the livelihoods of shipbuilders, steel-workers or computer programmers (Holt and others 2003, 23-28). Literature review Various sources were reviewed in this paper in order to form the most concrete realization of the problem and its solutions. The agricultural situation in the European Union 2003 Report studies the situation with supporting agriculture in the EU. The first part of the report presents the situation in the agricultural sectors and outlines the year’s activities. Policy developments and trends are described and the different agricultural sectors and policy areas are reviewed. The economic conditions, market tendencies, rural development matters, external trade cooperation’s aspects and the funding of the common agricultural policy are all discussed in this report. The second part of the report covers a broad range of statistics on agriculture in the EU community, broken down by Member State. In a format that has now become standard, these tables offer an update to the tables that have appeared in earlier reports. European Agriculture entering the 21st century gives the reader a chance to evaluate the phases of evolution of the agricultural conditions in the EU and in all Member States during the last 10 years. Completed by the European Commission’s Directorate-General for Agriculture, it is based generally on statistical information from European Statistics Committee and sets a basis for reflection in the context of the Commission’s Mid-term review proposals. The first chapter talks about the agricultural economy in the EU and gives statistics and graphs on the role of agriculture in the economy, the model of agricultural holdings, employment, prices, income and trade in agriculture. The second chapter covers the agricultural markets in the EU and includes market balance sheets for a definite number of agricultural products. The last sections titled “Expenditure and support for the agricultural sector in the EU” gives inforamtion on the main budgetary aspects. CAP reform: Impact analyses of the mid-term review July 2002 proposals is a reflection of the European Commission on the recent trends and aspects in the EU agriculture’s protection policies. This report covers a series of impact studies, which uphold the main orientation of its proposals from July 2002 to review the Common Agricultural Policy (CAP). The report states that decoupling help from production would result in manufacture adjustments where required, but would clearly not lead to production rejection. The studies also emphasize that the reforms planned by the Commission would significantly advance market balances. This means that in the future EU taxpayers’ money would not be spent on supporting those parts of the agricultural sector, which are forecasted to be unprofitable. The Commission’s aim to reduce direct payments and transfer more money to rural development, the so-called modulation, would produce little changes on markets. And the most vital result of the simulations is that there would be a constructive effect on overall farm income. The major impact of decoupling would be observed in the beef sector. Gardner, B., Swinbank, A. Sharma, D., Diaz-Bonilla, E. and Brandao, A.S.P. (2003, 85-114) argue that social importance of the farm sector – considerably out of proportion to the number of people involved – is what gives the agricultural sector its secondary political importance after the provision of food. The authors state that in the European Union, with its initial very high proportion of the population still on the land – close to 20 per cent in the early days of the EU, the social significance of agriculture was probably as important as its strategic role. This social significance has since declined, but politicians still make obeisance to it. These scholars note that agriculture, in most developed countries, is also unique in having the most single-minded and effective political lobbying organisation. This is most marked in the European Union and the United States. Like other single-issue pressure groups such as industrial trade unions, the farmers’ unions have only one main objective: to maintain the living standards of their members. Unlike the industrial groups, however, they can utilise a whole range of powerful strategic and emotional arguments for the maintenance of farmers’ incomes. Farmers also have a social advantage over other trade unionists: in all developed countries without exception, they are an important part of the social structure of their regions – which are relatively under-populated – and therefore have an inordinate influence over local and national government politics. Data and Methodology We employed the method or scholarly works and publications’ review, which is performed with the purpose of developing a good understanding of the EU’s spending on agriculture as well as reasons for such actions. In the EU, the influence of the agricultural constituency over the political system is exceptional.

It is generally accepted that the inordinate involvement of the farm organisations in policy formulation is a major factor which has diverted politicians from any radical change and improvement in the operation of the CAP . The EU farmers’ union federation, Comite des Organisations Professionelles Agricoles (COPA), for example, has constitutional rights of consultation in the European Union’s policy formulating and decision-taking process – a right consistently denied to consumer organisations. As a federation and in its constituent national parts, it has considerable influence with the Council of Agriculture Ministers – the supreme body formulating agricultural policy in the EU – and with national ministers and ministries of agriculture, as well as with the EU Commission which administers and manages the policy (Achievements in agricultural policy 2004). Indeed, many of the current considerable shortcomings of the European agricultural policy can be squarely blamed upon COPA, since it was closely consulted on the measures and mechanisms needed to support farmers when the agriculture policy was first established in the late 1950s and early 1960s. Subsequently, evidence from EU officials and working papers of the EU Commission and Council of Ministers shows that a great deal of the blame for the inadequate action taken by the Council to deal with surpluses and over-spending in the 1990s could be attributed to COPA’s role in the decision-taking process . In particular, these bodies accepted two COPA arguments on the future of agricultural production and trade which proved fatal to the taking of any decisions which would have averted the subsequent crisis of over-production and over-spending which evolved in the 1980s. Policy-makers in the 1970s accepted the European farm organisations view, first, that future productivity increases in agriculture would not be anywhere as great as independent analysts were consistently warning and, second, that there would be a substantial expansion in international demand for agricultural commodities which would automatically reduce the budgetary pressure to control European food surpluses. Both contentions were proved phenomenally wrong. EU agricultural productivity in the major sectors continued to increase at over 5 per cent a year, while world agricultural production and surpluses rose to an all-time peak in 1985–86. As a result of the power and influence of the agricultural lobby in the formulation of the CAP, the EU has one of the most protected and subsidised agricultural industries in the world (The agricultural situation in the European Union 2003 Report, 2004). Of course, all governments everywhere interfere in agricultural markets. Some interfere more than others, however. In countries like Argentina, Australia and New Zealand support of farmers is minimal; in the United States and the European Union it is comprehensive and lavish; while in Norway, Finland and Japan it is, most experts would agree, excessive. There are of course variations in the way in which farmers are supported. In the United States – as in the United Kingdom in pre-EU times – farmers are guaranteed a minimum price which is normally above the price which consumers pay for their food. The difference between the high guarantee and the lower shop price is made up by a direct payment to the farmer, generally known as a deficiency payment. Under the deficiency payment system both farmers and consumers benefit: the farmer, through a guaranteed price above the world price level; and the consumer, from lower wholesale and retail prices. In a deficiency payment-based system it is the taxpayer who pays. In a country with an equitable tax system, the rich therefore pay more than the less well-off for supporting agriculture . Main issues within the EU community In the EU both taxpayers and consumers pay, the first through financing subsidies and the second through high retail prices for food. The EU system is thus regressive since the less well-off pay proportionately more for food policy through higher shop prices for food (European Agriculture entering the 21st century 2003). In the EU the high price to the farmer is still – despite the recent reforms – sustained by the purchase of food commodities at an official floor price – the so-called intervention price – and by levying high taxes on cheaper imports to raise them to the same level as the high internal EU intervention price. Surplus produce is exported with the assistance of subsidies which allow the artificially high price of the EU commodity to be sold at the much lower world price level. Since 1992 the EU has begun to support farmers through a combination of market intervention and direct subsidies (Achievements in agricultural policy 2004). Support and protection for farmers is almost universal and for basically good reasons. These reasons have, however, over time, become overlaid with other much less good reasons. What varies and what matters is the method of support and the level at which that support is maintained. The European Union’s problem is not that it supports farmers’ incomes, but rather that it supports them with market price floors or subsidies – or a combination of both – which are too high in relation to the production costs of the efficient farmer and to market demand. This is the cause of surplus and a $50-billion-a-year bill for supporting the farmer. This is why EU production has steadily increased throughout the twenty-five year life of the CAP and why food surpluses and budgetary excesses have risen more than in most other developed countries. The Union has not adjusted its agriculture policy to deal with the realities of modern agricultural technology and modern international political relationships. The justification for the EU’s covert objective of super-sufficiency in food is challenged in a world where imported supplies are unlikely to be cut off by war or where if they were, domestic supplies would be poisoned by nuclear fall-out. More important, however, EU policy has not taken into account the effect on production of the advances of modern science. Thus, while the individual incomes of the more efficient farmers have tended to increase – thus stimulating them to increase output even more – the incomes of farmers on average have tended to decline compared with the rest of the population.

While the incomes of most people outside agriculture have increased steadily during the last two decades, the average incomes of farmers have tended to remain largely unchanged. In the EU countries where the largest sums are spent on agricultural support – Germany and France in particular – average farm incomes have in the 1980s declined the most. Problems in agriculture What is most significant is that agricultural costs have risen most in those countries. Economists see this as indicating that the high prices paid for farm commodities have been absorbed by higher costs of production (CAP Reform 2002). In particular, the high commodity prices have been capitalised into higher land prices. This exacerbates the small farm problem by forcing small landholders off the land. Price support policies make large-scale farming more profitable and provide incentives for expanded production on large farms. At the same time, they provide incentives for small farms to abandon farming. Rising product prices lead to progressive increases in farmland prices and in farm rental values, so that it may become more attractive for small farmers to quit agriculture . In other words, the process of artificially supporting farmers becomes self-defeating: maintaining high prices does not provide adequate income support to the majority of landholders, but instead provides every incentive for them to move off the land. The inevitably larger units remain, producing yet more surplus commodities, stimulated by the excess profit resulting from support prices essentially set at a level designed to maintain the incomes of the less efficient and smaller farmers. The large farmers are harnessed to the productivity treadmill at an ever-increasing rate, while the small farmers drop out. Villages disappear and the countryside becomes more empty and desolate. However, though all developed country governments protect their farmers, not all protect them as lavishly as the Europeans and the Japanese. In countries where agriculture is not only a mainstay of the economy, but also where it is not possible to subsidise agriculture from the wealth created in other parts of the economy, farmers have to work at close to the world price. Farmers in Australia, New Zealand and South America have to work on this basis. New Zealand is a particular example. A country which has only been able to subsidise its farmers in the most minimal way and has always been at the bottom of the world’s farm subsidy league, New Zealand in the early 1980s abolished almost all of what little support had existed. The New Zealand agricultural economy is probably the most exposed to the hazards of the world market of any in the developed world (The agricultural situation in the European Union 2003 Report, 2004). As a result, it is not surprising that successive New Zealand governments have sought to protect the agricultural sector from what was assumed to be the harmful effects of those hazards. However, in keeping with the ‘new economic thinking’ which became popular in the late 1970s and 1980s, the Lange Government, which came to power in Wellington in 1984, decided on a policy of general deregulation in the economy – including particularly agriculture (Holt and others 2003, 23-28). It is this interaction of agriculture with the environment which is becoming of increasing importance in the European Union. It is now at last being accepted by politicians that the combination of high EU support prices and the application of modern technology which they have encouraged has been responsible for imposing considerable strains on the rural and total environment. Increasing applications of nitrogen to arable crops and the intensification of livestock farming in particular are now the major causes of excess nitrogen levels in drinking-water supplies; intensive agriculture has without doubt destroyed large areas of habitat for increasingly rare wild animals, birds and insects. Increasingly, under pressure from the environmentalist movement, politicians are being forced to incorporate environmental considerations into agriculture policy decisions. The politicians are also now much less convinced that protecting farm and food markets is the way to protect farmers and to maintain their incomes. In recent years, the failure of the CAP to protect the incomes of the majority of smaller farmers or to arrest continuing rural depopulation has convinced leading EU politicians that the policy must be reformed (European Agriculture entering the 21st century 2003). Future of the EU’s agriculture The problem for the Union is that the CAP sets farm support prices at the high level theoretically needed to bolster the incomes of the less-than-efficient majority (CAP Reform 2002). But the problem is that no matter how high the price level, it is seldom high enough to maintain a decent income for the small and inefficient. It is simply mathematically impossible for it to do so. A French hill farmer marketing perhaps ten beef cattle a year worth $ 1500 each adds little to his income if the price is increased by 5 per cent; a 2000-hectare wheat farmer would, however, gain close to $12,000 from such a price increase. At last convinced of the inadequacies of the CAP, the European Commission plans to make other radical proposals for reform. These include the significant reduction of market manipulation and support for cereals and the use of direct payments to small farmers, to compensate them for the inevitable loss resulting from support price cuts, and possible reductions in output quotas (Holt and others 2003, 23-28). There are recommendations for the reduction of excess production in the dairy and beef sectors, but these were to a great extent excised by the Council of Ministers in the subsequent passage of the proposals through the legislative system. What had to be changed, the Commission emphasised in its 2003 proposal, was the system of support dependent on market price guarantees. Because support was based on the volume of production, it therefore concentrated the greater proportion of support on the largest and most intensive farms. The Commission’s proposals were unequivocal on the objective of EU agriculture policy in the future. Sufficient numbers of farmers must be kept on the land. There is no other way to preserve the natural environment, traditional landscapes and a model of agriculture based on the family farm – as favoured by society generally.

This requires an active rural development policy and this policy will not be created without farmers. The future objective as far as the Brussels policy-makers are concerned is thus quite clearly to use the modified CAP as a means to maintain the structure of the countryside, as the Commission believes the majority of people want it to be. This established an important environmental and social dimension in agriculture policy formulation which has set the pattern for the future (Achievements in agricultural policy 2004). Summary and conclusions It can be assumed, somewhat paradoxically, that despite the preoccupations of policy-makers in the 1990’s with making agriculture more subject to market forces, agriculture will have become more rather than less regulated. The overwhelming trend of thinking on agricultural policy in the early 1990s was that agriculture policy was too important to be left to agriculturalists. The predominance of this attitude will lead inevitably to the increasing input of environmental principles into agricultural policy-making with increasing importance not only of society’s desire to prevent farming from further polluting the soil, the water and the atmosphere, but also to mould agriculture policy so as to ensure that the countryside and its guardians also increasingly become the providers of environmental services. The EU manipulated markets for farm commodities will become less and less important in maintaining farmers’ incomes. While a large section of the agriculture industry will still gain its income from the sale of the basic food commodities, this produce will be sold at very close to world prices – with little subvention from the EU or national funds. In order to ensure adequate incomes, farmers will still draw direct subsidies from the state (including the EU super-state) to compensate for the very much less intensive methods which they will be forced to practise. Failure to comply with limitations on the application of nitrogen and phosphates to the land, restrictions on the disposal of livestock effluent and controls on the use of pesticides – all likely to be embodied in land management contracts between farmers and the authorities – will result in non-payment of environmental subsidies which will have largely replaced the market-support subsidies of the past as the main and necessary supplement to farm incomes . Despite this apparent limitation on the European Union’s agricultural production, new scientific developments, mainly in the realms of biotechnology, will sustain still high levels of agricultural production. New plant varieties bred for insect and disease resistance will be teamed with low-concentration but highly effective herbicides to produce still larger crops of high-quality wheat and other commodities. These crops will be genetically engineered to produce more exactly the qualities demanded by the millers and other processors of food. At the same time, a growing number of farmers will be producing very high quality crops of fruit, vegetables, meats, dairy products and first-stage processed foods, which will be demanded by an increasingly critical clientele of direct ‘farm-gate shoppers’. There will thus still be the ‘two agricultures’ which were developing in the 1980s: the bulk food producers and the organic and near-organic quality producers. The difference between the two periods is, however, that even the majority, bulk-producers, will be growing a higher-quality product than they would have done twenty years previously – and in a more environmentally tolerable manner. There will by then have been a much more marked ‘division of labour’ among the farmers of Europe as well as a more efficient exploitation of comparative advantage. The removal of technical barriers resulting from the application of the principles of the EU’s integrated market will have meant the removal of the technical barriers to trade between the agriculture industries of the different EU countries. Thus it is probable that cereals and oilseeds will be grown in the north of France and central Europe. Dairy products, beef and lamb will be produced on the grasslands of the north-west (the British Isles, Denmark and Sweden), pigs and poultry close to the ‘grain baskets’ of the central plains and the bulk of the fruit and vegetables under the Mediterranean sun of the southern countries of the Union. Thus, nearly fifty years after its inception, the European Common Agricultural Policy may achieve the objectives originally envisaged by its founders.