Europe's Slow Agricultural Reform

The 34-member Organization for Economic Cooperation and Development, in a report issued Wednesday, says European farmers are much less dependent on the subsidies and other forms of support that have made them some of the world’s richest and helped to lock out cheaper goods from impoverished nations.

The decline in support, according to the 184-page Evaluation of Agricultural Policy Reforms in the European Union is due to many factors, but high commodity prices – which now have begun to sink globally – are the primary cause for the decline. And despite 25 years of attempts by the European Union to cut support for farmers, they still earned 22 percent of their total annual income from government support. That is down from nearly40 percent between 1986 and 1988.

There is a very real danger that commodity prices are going to fall steeply over the next three to six months as uncertainty lingers and demand slows across the globe. China, whether it comes in for a soft landing, as the optimists believe, or a hard one, according the pessimists, is a major factor. And, depending on what happens to Greece and the crisis in the Eurozone, prices could fall a further 15 to 20 percent, once again raising demands from the European agricultural community for support prices to come back into effect. Over the last month alone, corn is down 23.3 percent, wheat 22.4 percent and soyabeans 21 percent.

Past price supports have delivered vast food waste. Although waste has slowly been reduced, in 2007 it was reported that European countries had been producing 1.7 billion more bottles of wine than they could sell, with hundreds of millions of bottles turned into industrial alcohol. Likewise, Europe faced so-called “butter mountains” and “milk lakes.” In 2009, the EU bought 30,000 tons of unsold butter at taxpayer expense. More than three times that amount of skimmed milk powder also accumulated in warehouses, paid for by the EU.

However, the report says, “Successive reforms of the CAP have made the sector more market oriented, allowing producers to rely more on market signals and less on support to guide their production decisions.”

Despite the decline in support, overall government support for farmers from the Common Agricultural Policy amounted to €77 billion in 2010 from direct payments and the impact of government policy on prices. Nearly 45 percent of the entire European Union budget for 2010 went to expenditures for the common agricultural policy, according to the report.

In particular, critics complain that EU farm policy has damaged African agriculture, where farmers in the tropical sun in Kenya and other nations can produce vegetables far cheaper than they can be produced in Europe, including with shipping costs.

Although some critics have complained about the effect on climate change from energy use to bring the produce to the northern hemisphere, in fact per-unit costs for transportation are relatively small and are more than compensated by the cheaper cost of energy to grow and cultivate in the tropics. Much of Europe’s produce is grown in heated hothouses and fertilized with chemical fertilizers.`

Nor does the United States escape blame. Subsidies for US cotton farmers and others has kept cheap African cotton in Africa instead of on the mills and looms of clothing producers.

Rep. Charles Stenholm, the ranking minority member on the House Committee on Agriculture, was quoted as saying that: "I would be willing to eliminate cotton subsidies tomorrow if all the other countries would eliminate their subsidies for fibers, but we're not going to unilaterally disarm our farmers in that world market."

Whittling away at farm subsidies in Europe has been a long, slow slog. Efforts to reform farming have been continuing for 25 years, and sidetracked often. In 2002 for example, French President Jacques Chirac and former German Chancellor Gerhard Schröder agreed to preserve spending until 2013 The French and German agriculture ministries have announced they will set up a joint group to look at the policy after that.

That is because especially for French and German farmers, trying to cut subsidies has been the third rail of European politics, bringing the farmers into the streets. Protection of European and American farmers has stalled the Doha Round of agricultural trade talks for eight years, since they broke down in 2003 in Cancun, Mexico.

The Common Agricultural Policy “distorts the economy, requires costly administration and harms European export interests,” according to an organization called “Reform the CAP.” It also stifles and distorts fair competition among member states,, undermines farmers’ self reliance, doesn’t take into consideration environmental concerns, damages biodiversity, fails to mitigate climate effects and doesn’t promote rural growth and development.

The share of commodity-specific support has substantially decreased, being replaced by support that doesn’t require production of any commodity, the report continues. Domestic intervention mechanism, while they have been reduced, still provide a market floor for some commodity sectors.”

As market price support is reduced, according to the report, “benefits include lower consumer costs…although taxpayers bear a larger share of the costs due to the introduction of direct payments.”

Improving farm competitiveness has long been an objective of the CAP, but “There is a recognition that adjustments are needed to improve competitiveness and that some farms will not make it.” The EU has introduced measures thus to move some of the rural population out of farming and into other ways of making a living.

The CAP “will have to continue to pursue a number of economic, environmental and societal objectives, and adapt to changing priorities,” the report says. “Growing demand and higher commodity prices will offer major opportunities to the EU agricultural sector, which will also face major challenges, including food security, sustainable use of resources, mitigation

and adaptation to climate change, and market volatility.” Indeed, market volatility may well be the biggest issue the Eurozone and the CAP face as the global economic crisis returns with grim certainty.

Nonetheless, according to the report, slow inroads continue to be made against protectionism.

It calls for the removal of remaining impediments to the functioning of input and output markets, more open access to the European market and transparent EU-wide markets for the sale and lease of land, production quotas and payment entitlements, greater investment in agricultural innovation, introduction of an effective framework for risk management, steering clear of areas where private sector solutions exist, such as production contracts, insurance and futures contracts, targeted efforts to improve environmental agriculture, including direct payments to farmers, when necessary, for provision of environmental goods and services.