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EU fruit & veg, dairy, meat & wine support survives in new CAP, simpler GI system

Download the new Special Report from IEG Policy

The EU food and drink sector has an uneasy relationship with the Common Agricultural Policy. But under the new CAP proposals for 2021-27, many market support measures will be maintained, while the system for registering geographical indications (GIs) will be made easier.

The following article is an extract from IEG Policy’s new Special Report, titled ‘Reforming the CAP: Proposals and Prospects for 2021-27’. It examines the European Commission proposals in close (but never painful) detail and looks at the key issues surrounding the debate, as well as looking at the future course of European Agriculture as we enter the third decade of the 21st Century.

IEG Vu subscribers can download a free copy by following this link.

Backdrop of new trade deals

Most food businesses would basically support the European Commission’s well-rehearsed PR line that the CAP plays a vital role in providing Europe with safe, healthy food, in adequate volumes and at reasonable prices.

On the other hand, the model of agriculture which the CAP supports is not always the most economically efficient one, and the support provided to European agriculture comes at the price, in some instances, of limited access to imports from third countries which might be cheaper.

Viewed from the farmgate perspective, there are inevitably going to be battles over the prices and contracts offered by processors and retailers, and a series of legislative initiatives in recent years have sought to give farmers a stronger position in negotiations with purchasers. These are not going to be revisited to any significant extent in these latest reform proposals.

And from the point of view of international trade too, the new CAP proposals have no direct impact. The changes relate entirely to modifications to Europe’s internal farm policy, and there will be no changes to tariffs or quotas on imports, or any significant modifications to the food regulatory framework.

That said, however, the proposals have been put together against a backdrop of trade initiatives which look set to further open European markets to imports, in some sectors more than others.

With hopes of a new multilateral agreement to liberalise agricultural trade via the WTO Doha Round process now buried – a development which pre-dated the arrival of the anti-multilateralist Donald Trump in the White House – the EU has been pursuing a vigorous policy of striking bilateral and regional trade agreements with key economies.

In recent times this has yielded new trade deals with Canada, Japan and Mexico (the latter two now pending ratification), as well as negotiations with the South American Mercosur bloc, and with Australia and New Zealand (just under way).

An initiative to negotiate a trade deal with the US, in the form of the so-called TTIP agreement, has run aground on the sandbank of regulatory differences between the two sides.

The Japan and Mexico deals in particular are, broadly speaking, a ‘good news’ story for European agriculture in that they will offer substantial additional market access for European exports of high-value dairy, pigmeat and wine products in particular.

But with the impending new deals with Mercosur, Australia and New Zealand, the trade dynamic is different, and the deals offer the prospect of significant additional imports from highly-competitive world-leading exporters. The concerns that this has provoked among European farmers’ organisations are of a scale that the Commission is unable to ignore.

There has therefore been a substantial focus in the new proposals on securing the viability and sustainability of European farmers who might otherwise struggle to cope in a liberalising European market environment.

The Commission’s dilemma – caught between a basic commitment towards greater market orientation for the CAP, and a Treaty-mandated requirement to support farmers and farm incomes – is articulated very clearly in an introduction to the new draft basic Regulations:

“Securing an adequate level of support and thus farm income remains a key element for the future, in order to ensure food security, environmental and climate ambition, as well as rural vitality. Better targeting of support to small and medium sized farms and areas with natural constraints can help keeping more jobs on farms and farming activity on the whole territory, hence strengthening the socio-economic fabric of rural areas. Capping and convergence can improve the distribution of direct payments.

“It is clear that any option that significantly redistributes direct payments towards farms and regions of lower productivity will, in the short-term, lead to a reduction of EU competitiveness, while it enhances the protection of the environment. Less clear, however, is the appropriate combination of measures that could mitigate negative income effects while at the same time better addressing challenges that are also pertinent for agriculture - such as environment and climate, or societal expectations. This requires incentivising adjustments that improve both the socio-economic as well as the environmental performance of the sector.”

Market support measures

For well over two decades now, the CAP has channelled most of its financial resources into support farm incomes, via direct payments to producers. But support to agricultural markets still exists in various guises, and will continue to do so through to 2027 at least.

In fact, some €19.3 billion  has been allocated to market support measures in the draft MFF for 2021-27. Much of that €19.3bn is allocated to programmes to regulate the markets for fruits and vegetables and for wine. This money is channelled to recipients via Producer Organisations, who have responsibility for operating Operational Programmes (OPs) to regulate the markets in their local area.

Such programmes can be highly interventionist in nature. As well as aiming to meet objectives such as investing in higher quality output and improving marketing and promotion, most OPs also include schemes to hold produce off the market in case of oversupply, and even its effective destruction in the event of a serious problem.

However, such intervention tends to escape the critical gaze of the European public, probably precisely because its operation is devolved to the various producer organisations, rather than overseen and directed centrally by the Commission.

Meanwhile, less drastic but still highly market-distorting measures are also an option in the dairy sector – this time not administered by producer groups, but with the Commission acting as market manager. 

Intervention buying for butter and skimmed milk powder still remains in place, representing in effect the last bastion of the heavily interventionist CAP of the 1980s.

Intervention prices for dairy commodities have remained unchanged for over a decade, and until the dairy price crash of 2015 it had been widely assumed that, with market prices generally well above intervention levels, the measures were on the statute books simply as a historical relic.

This view had to be quickly revised, however, when a prolonged slump in the price of skimmed milk powder led to some 380,000 tonnes of SMP being bought in by the Commission between 2015 and 2017. The huge stockpile thereby generated is only now being gradually released back to the market.

Intervention will thus continue to be available to European traders until 2027 at least, at the current ‘safety-net’ buying-in prices of €2,463.90/t for butter and €1,698/t for SMP.

As well as traditional intervention, the current private storage aid (PSA) system is also set to be retained. This is a programme under which traders may receive EU aid to withdraw product (mainly butter, SMP and pigmeat) from the market on a temporary basis when prices are low, and release it back to the market at a later stage when the market is more favourable.

Coupled aid payments

The Commission and member states have further tools at their disposal to influence not only the incomes that farmers receive, but also the types of agricultural product that they produce.

The ‘decoupled’ direct payment system remains the bedrock of the CAP’s support system beyond 2021. But in some cases, payments will remain ‘coupled’ to production. In such cases, a farmer only receives the aid if he/she cultivates a particular crop, or keeps specific types of livestock.

For these payments, area and headage limits are established for each participating member state, so as to avoid the risk of encouraging over-production (and in order to allow such payments to be declared as ‘Blue Box’ subsidies in the WTO context, rather than fall into the ‘Amber Box’ category, for which limits apply).

The schemes are optional at member state level, but in 2014-2020, every member states other than Germany opted to operate coupled aid schemes in at least one sector, and some 10% of the overall direct payment budget is currently being allocated to coupled aid schemes. 

The sectors in which coupled aid payments schemes may be applied were significantly expanded in 2014-2020 as compared with the previous version of the CAP, in which coupled aid payments were seen very much as the exception to the ‘decoupling’ rule.

Member states currently have the option of setting up coupled aid schemes in almost every major agricultural product sector. All of these options are to be retained in 2021-27 - in fact, the only change is that one additional sector is to be added to the list of sectors where coupled aid may be paid, namely the non-food biomass crop sector.

On the surface, it may seem a little mysterious that coupled aid payments should be as popular as they are, given that they significantly restrict the farmer’s freedom of operation in tying him/her to a specific form of production. 

Such schemes are however often supported by the food industry, as in effect they create a semi-guaranteed supply of local raw material. Coupled aid schemes are a form of insurance policy against the risk of large numbers of local farmer either converting to a different form of production (as they would be free to do under a decoupled aid system), or abandoning production altogether.

In a sense, it can be argued that the coupled aid payments which operate in the dairy sector (in 18 member states) and in the sugar sector (in 11 member states) have the effect of negating, at least partially, the impact of the abolition of production quotas in these sectors in 2015 and 2017 respectively.

From national governments’ point of view, however, coupled aids are a way of offsetting the risk of rural desertification, which is viewed as a very real threat in a number of countries. Taking steps to ensure the continuation of beef and sheep production in a particular country or region, for example, not only keeps the livestock farmers in question in business, but also preserves the jobs of the feed merchants, abattoirs and vets who service that industry.

The continued presence of grazing livestock, in areas where they might otherwise no longer be kept, can also be viewed as a positive both for the environment and for tourism in the areas in question.

For all of these reasons, and despite the complaints of agricultural economists who regard coupled aid payments as the very epitome of resource misallocation, coupled aids are popular – and they will remain in place, at least until 2027.

Plans to make GI registrations more flexible

Another minor adjustment proposed by the Commission which is designed to help the agri-food industry involves a move to ease the EU’s internal procedures for registering new Geographical Indications.

Including wine denominations, the EU now has 3,400 GIs in place, and more are being added all the time as local producers seek to a) protect their food or drink product names against possible misappropriation by non-local producers and b) cash on the marketing boost which GI recognition always delivers.

Most of the proposed rule changes are fairly technical, but they are expressly designed to make it easier for food producers to register new GIs, and to speed up the authorisation process.

One way that this will be achieved will be to separate out the two main pre-approval functions of the EU executive – assessing compliance with intellectual property rules on the one hand, and assessing compliance of the product specifications with the relevant rules on the other – such that the process is completed more rapidly.

More powers are also to be given to national governments in making an initial assessment of the validity of a GI claim. The Commission will subsequently scrutinise applications submitted by member states, but their role will be “to ensure that there are no manifest errors and that Union law, and the interests of stakeholders outside the member state of application, are taken into account,” according to the text of the draft regulation.

 

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