Common Agricultural Policy (CAP) – that’ll be enough, thank you

Why wouldn’t EU farming be made subject to global verification? Food would be even 40% cheaper. And billions of euros would flow into the EU budget. The Third World countries, Ukraine and other countries much better suited to farming would finally be able to fend for themselves rather than rely on assistance.

When we were on the point of EU accession, a gaździna[1] that I know said to me: “We will get paid also for the meadows; you only need to mow the grass, without even picking it up.”

It’s hard to believe that the most protected area of the EU budget is the one that The Economist describes as the greatest absurdity of the EU economic policy, i.e. the Common Agrarian Policy (CAP). Farming funds, alongside funds within cohesion policy, are the largest part of EU spending, both in the 2007-2013 financial framework and 2014-2020 framework, which is in its final stage of negotiations. They amount to over 30% of total EU spending. The year 2012 marked the 50^th anniversary of CAP so it’s an excellent opportunity to recall all those follies that the farming policy has introduced and then came up with more follies to counter the effects of the previous ones.

Farming is a specific branch of economy that is most prone to natural market forces: plenty of producers and consumers and a limited choice of easily exchangeable products. Why would the state and later the EU want to intervene at such an unprecedented scale? Why are 2/3 of almost 100,000-page long acquis communautaire devoted to farming regulations? Why is it that the fewer farmers there are, the more officials servicing the agrarian policy?

Back to where it all started

Worth recalling is the fact that after the WWII, Europe bought food using coupons and American assistance also included groceries, so securing enough food – and even becoming self-sufficient – was a vital political goal. Farming organisations that wanted to make their incomes more stable demanded that the state should intervene. During the great crisis of the ’30s crop prices hit rock bottom.

At the beginning of CAP, its main instrument was guaranteed buying prices. If the market prices dropped to a certain level, the EC bought farmers’ produce at guaranteed prices. During lean years the Commission was to sell the surplus. It all led to the EU storage warehouses filling to the brim with products subject to the EU interventionism. There were mountains of meat and butter, lakes of milk and wine and no idea what to do with them. Getting it all back on the internal market would slash the prices back again and further intervention would be required. The European Communities budget allotted 70% of its spending to farming – buying up, storage, export subsidies – but it was all not enough. The EU got rid of the surplus on the world markets at dumping prices, which made farmers from the Third World go out of business. The surplus also contributed to more humanitarian food assistance programmes kicking off. Butter and powdered milk were rendered unfit for consumption under the watchful eye of food experts.

Every few years new names: Mansholt, MacSherry and Fishler marked successive CAP reforms.

Intervention prices were lowered. Payments for… letting the land lie fallow were introduced because that was economically more sensible than buying production surplus. Enlarging the vineyard area was banned and farmers were encouraged to decrease their land. Farmers were financially incentivized to reforest their lands, which actually made sense. Production quotas for sugar (1968) and milk (1984) were instituted and overproduction was severely fined.

Anti-globalism

Such policy was supported with an innovative, highly protectionist foreign trade policy in world history: high transportation tariffs, import prices, barrier prices, detailed and sophisticated sanitary and phytosanitary standards (SPS) e.g. even banana curvature was formally restricted.

There are countries in which whole national income is from farming. According to FAO for 70% of destitute people, farming is their means of support. Subsidizing the farming sector in rich countries and maintaining high import barriers by such countries increased poverty in Third World countries. According to World Bank findings, liberalisation of trade in framing produce would increase incomes of poor countries six times more than all the development assistance that they receive. And refusal to quit subsidizing rich countries was the reason why multilateral negotiations of WTO on liberal world trade in Doha initiated in 2001 failed.

After Doha last round of negotiations broke down in 2008, the EU has been more careful in entering into bilateral trade agreements. As the most unified economy in the world, the EU has a very strong negotiating position. In such bilateral agreements on liberal trade with Ukraine, Georgia and Moldova, the EU agreed to all kinds of liberal concessions with the exception of about 5 % of points on farming. In other words, Ukraine, Moldova and Georgia, world famous industries, will be able to export to the EU cars, computers and all sorts of machinery without any duties, or quotas, but they will be greatly limited in the export of cereal, meat, diary products or wine…

Ukraine, which has 70% of European black dirt will not be able to export substantial amounts of her foods. Meanwhile, the EU will make direct payments to all those European farmers with less fertile, mountainous lands. Ukraine itself is not ready to export food on a large scale yet, and it happens that it imposes export tariffs as well. But it is tempting to think that it would be possible to boost Ukrainian export, attracting at the same time capital and know-how and make Ukraine the granary of Europe once again. According to FAO, Ukraine would be able to increase its farming production three times. European protectionalist policy brings losses to the EU itself, Ukraine, the consumer, who has more expensive and less varied products to chose from, and finally the European taxpayer, because they pay more to support the least efficient and expensive producers. The only ones who benefit are the farmers of the EU – one small group that produces expensive and not competitive produce, and that would be forced to look for other employment if the European market opened up to neighbouring country which will enter into the EU. How many people will lose their jobs and will be forced to seek another employment after the EU floods them with more competitive goods. Opening the market is beneficial in the long-run because protecting non-competitive job positions does not increase the well-being. What it does though is to use up country’s national resources, workforce including, ineffectively. The USA do not produce watches, shoes, VHS-players, camcorders or countless other products any more, because there are others who do it much cheaper and better. Poland has seen a lot of its industrial plants slimmed up because they would not be able to keep up with the opening of our market. Sweden – which used to specialise in ship-building – has closed down its shipyards. And the Netherlands have ceased to turn out their own cars, buses and planes. Why wouldn’t EU farming be made subject to global verification? Food would be even 40% cheaper. The EU budget would gain billions of euros even after it provided all the necessary aid to farmers re-qualifying. The Third World countries, Ukraine and other countries much better suited to farming would finally be able to fend for themselves rather than rely on assistance.

Measures not proportionate to aims  

Direct payments still remain the most wasteful transfer of public means which could be put to a better use. The EU goes on and on how means should be effective and proportionate to the aims. Can the objectives of the farming policy be fulfilled by CAP?

The main aim of CAP is to provide food for all its citizens maintaining the highest quality, quantity and security standards. Area payments encourage small and numerous agricultural holdings to maintain hectares of land and prevent those bigger and more efficient ones from enlarging. Land, workforce and production capital are artificially maintained in the least effective agricultural holdings. Big holdings are more efficient in natural markers: yield per hectare, milk yield of diary cows, increase in meat volume from one unit of fodder, as well as income per one worker. Mean size of an agricultural holding in Poland is about 10 hectares and one farmer creates four times less DGP than one person employed outside farming. It is only in the 30-hectare large holdings that one farmer works out equal value of GDP as one employed in a different sector. But such holdings amount to 3-4%. An apt example is New Zealand, which abolished subsidies for farming in the period 1984-1987 and is now one of the most efficient agriculture economies exporting the most produce per one worker.

One of CAP aims is to provide food security in the EU. Would opening the market and getting rid of subsidies pose a threat to our food security? The same question made by the EU with respect to energy supplies produces a totally different answer. Nobody of sound mind would ban importing oil and gas to the EU and start constructing coal mines indiscriminately without considering the costs, just like in Poland in Gierek times, only to secure self-sufficiency. And meanwhile in 2012 the EU (Norway including) imported 86% of oil, 64% of gas and 48% of coal. These figures, despite strong support for the domestic renewable energy industry, will not change. What’s more, the main suppliers or gas and oil are Russia and the Near East, which use their advantageous position as a political tool. Removing the protection of the food production market would increase the import but on a much smaller scale than in the case of energy sources. The suppliers would vary more, geographically and politically. Smaller and less efficient agricultural holdings in more difficult geographical areas would not stand the competition. But there’s no reason to believe that large efficient European holdings, whose potential is now curbed by milk, or sugar quotas and incentives to let the land go fallow, would not hold out global trends. Restructuring programmes for the least-developed areas would have to be initiated and perhaps it would be wise to secure some part of food supplies, like the 90-day energy supplies reserve, but all in all, the EU would benefit from it all, economically, budget-wise and even the consumer would be happier.

Securing farmers’ incomes is another important goal of CAP, but others should not be burdened with the fulfilment of this goal. In times of prosperity – like the recent boom in the prices of many farming products -the farming sector does not give back the the “surplus” income. A lot of professional groups would want to have their incomes guaranteed by the state, but the vast majority of employees cannot enjoy such guarantees. Not even those employed in sectors dependent on the natural environment, like construction industry or tourism, and still they get by somehow. The improvement of farmers’ financial stability can be achieved with the help of banks and insurance companies on a strictly commercial base, as happens nowadays to some extent. Such companies have even started offering insurance for skiing resorts in case of a lack of snow. The state in such an arrangement would only be the last resort to turn to e.g. in case of natural disasters.

What’s more, and more importantly, it is estimated that 80% of CAP assistance goes to 20% of the richest agricultural holdings, whose owners are far wealthier than the average taxpayer. There is the British queen, and a few dozens of lords, as well as a few most affluent French families. There’s no reason to let taxpayers fund the crème de la crème of Europe just because they are heirs to great agrarian holdings.

The Commission means to further reform CAP for the 2014-2020 framework. The main change would be increasing direct payments, introduced in 2003, which are paid to every farmer per hectare of land regardless of the crop being grown there, but providing that the farmer complies with EU directive concerning ecology, animal well-being, sanitation requirements etc. One advantage of direct payments is meant to be making EU budget intervention dependant not on specific products, but on a specific agricultural holding. As a result, farmers will get back in touch with the market situation and start producing in answer to the market needs and not according to what kind of product is currently best-subsidized. What’s more, the reform also aims to raise ecological and other standards of production. “We’ll make agrarian policy greener.” – as Brussels announced.

This justification to carry on with farming subsidies does not rise up to the most basic arguments. The production will be lucrative not because there’s demand and the consumer will cover everything, even the gains, but because it is on the taxpayer’s shoulders. Perhaps the production of the most intensively farmed produce will be limited according to the rule “you only need to mow the grass, without even picking it up”. First such signal came from Bulgaria, where direct payments per hectare since 2008 have lowered the production in the branches demanding the most capital and workforce, such as cattle breeding and vegetable growing, as well as caused a general production drop of 19% in the years 2000-2012. Contrary to what the Commission officials say, area payments also distort market signals and result in an irrational allocation of means, tough in a more enigmatic way than financial support for specific products.

It is a complete and utter nonsense to subsidize farmers based on their compliance with ecology, animal welfare or sanitary standards. Violating such regulations in all other economic branches, from steelworks and car manufacturing to transporting horse-drawn carts from Palenica Białczańska to Morskie Oko, is severely punished with a fine or even prison term. The EU does not make payments to producers or consumers to comply with its directives, except for farmers, who will receive substantial grants, and the Commission hails it as a break-through reform.

Another ill-fitted cover for financial transfers for farming is the argument that such policy helps to preserve the multi-functional and unique character of European rural areas, or the one about making use of European farming as our common good, which would cease to exist but for the subsidies. Let us note, however, that European farming has changed traditional European countryside to a greater extent than urban sprawl or constructing transport corridors. Deforestation for farming lands has depleted natural forestries to such a degree that certain animal species (bears, deer, lynx) are only to be found in natural reserves. Nitrates and phosphates flowing into the Baltic Sea from farming lands cause oxygen desserts at the bottom of the Baltic Sea and threaten the future of this body of water. In order to let our children see traditional countryside, we don’t have to allocate extortionate sums of money to thousands of agrarian estates that use large scale industrial methods of production; it would be enough to maintain traditional farming in one village per region.

The way out is to…

1. resume Doha negotiations and put forward a unilateral plan to remove import tariffs,
2. phase out subsidies e.g. by their gradual lowering by 1/7 over the course of seven years,
3. restructure the second pillar – rural development – so that it supports diversity of rural employment as now it is only directed to farmers,
4. intensify social assistance programmes for the poorest farmers who will not be able to find alternative means of support,
5. limit education for farming professions at secondary and higher levels to support others, improve foreign language learning, make Internet more widely accessible etc.,
6. and provide more pragmatic definitions of food security in the EU more suited to globalisation era.

CAP has already fulfilled its goals and it only prevents the natural creation of well-being of European citizens and fostering good relationships with other countries. We can either become aware of this or let farming lobby continue pulling the strings of agrarian policy for their own benefit.