Peter Midmore says the stakes are high for Welsh farmers in the negotiations now underway in Brussels to decide future agricultural support

August 30th, 2012

Once a decade or so, the EU’s Common Agricultural Policy, or CAP for short, undergoes a major reform. Partly, this stems from the fact that European policies operate on a fixed budgetary programming cycle. That means that when the opportunity arises – as it does in 2013 – policymakers across Europe seek to incline the framework of support a little more in their own favour.

The current vogue is to address issues such as global food demand and price spikes, the binding nature of greenhouse gas emission controls, and the effect of austerity policies on a larger and more diverse group of member states than existed in 2003, when the last major reform took place. How, and why reforms take place is important to Wales, because of its large share of agricultural land compared to the UK as a whole, the relatively small size of its farms, and the scattering of large numbers of small-sized communities in the rural Canolbarth.

Future of Rural Wales

This is the fourth in a five part series on the economy of the Welsh countryside. Tomorrow Terry Marsden says there should be greater effort in making connections between town and country to improve the outlook for both.

The 2003 reforms included an especially radical innovation, the ‘decoupling’ of direct farm support payments. Until then, payments had been made on the basis of the level of output produced. For example, in 2004 within certain limits each breeding ewe qualified for an annual premium of £15.52 in the lowlands, increased to £20.43 in hill and upland areas. Under World Trade rules, this subsidy on production makes the export of food into the EU from other countries more difficult. To make progress in achieving a trade deal (while at the same time considering the lobbying power of farming interests) all previous support for cattle, sheep and arable crops and a range of other special interest payments has been rolled up into a Single Farm Payment. Controversially, this is paid regardless of how much or how little is actually produced. There were three options for calculation of this payment:

  • An equal average payment for each hectare of farmland.
  • A payment to individual farmers based on their historic receipts.
  • A mixture of the two to provide a smoother eventual transition to the former.

Because of the wide diversity of types of agriculture in Wales, an equal area payment would have (counter intuitively) redistributed payments from intensive producers struggling with high costs and low margins, such as Pembrokeshire dairy farmers, to extensive hill farmers producing on highly marginal land. Hence Carwyn Jones, Minster for Rural Affairs at the time, opted for a pure historic reference period system, even though it, too, has had a fair share of anomalies to contend with.

Nevertheless, in general terms inequity is the hallmark of the farm support régime. It pays more to larger farmers since, famously, the Queen and the Duke of Westminster receive £500,000 or so annually, whereas very small farmers are entirely excluded from claiming payments.

Within countries there is also wide spatial variation, with more peripheral, marginal livestock farming areas receiving far less than the cereal baronies of East Anglia, Central and Northern France and most of the German plains. The effect on land prices is such that new, young entrants to farming face impossible borrowing requirements to establish a foothold in the industry. More importantly, in political terms payments vary across member states, particularly to the detriment of most of the countries who joined in 2004 and 2006. Because they had no votes at the time of the 2003 reform, these receive considerably less than half of the average value of Single Farm Payments made in the EU as a whole. Now, acting together, they can forma blocking minority in the decision-making process, ensuring that their interests will be fundamental to any overall compromise. And lastly, although good agricultural practice is a precondition for payment, this effectively means that unless environmental regulations concerning pollution and the like are not broken, farmers receive the cash: there is a social inequality because no other group in society receives payments for doing what they would have done anyway.

The pragmatic response of the European Commission’s proposals for reform, widely (and accurately) leaked beforehand, but published formally in October last year, seek to address all of these issues in a comprehensive package of reforms:

  1. An accelerated redistribution of payments between member states is proposed, prioritised for those receiving less than 90 per cent of the current average, with the overall objective to equalise direct payments to farmers by 2020.
  2. Direct payments based on historic reference criteria, such as those paid in Wales, may no longer be made: equal area payments will become universal.
  3. Only 70 per cent of the new payment will be received automatically, with the remaining 30 per cent being conditional on meeting simpler, clearer conditions for social environmental benefit; mainly, these include more diverse crop rotations, or keeping livestock on permanent pastures, or adopting an organic farming system.
  4. Only active farmers will receive payments, and these will be tapered, from €150,000 up to a maximum total annual payment of €300,000, with some remission to reflect wages paid to employees.
  5. Young entrants to agriculture will receive a 25 per cent enhancement of payments, for the first five years after the establishment of their new farm businesses.

So far, none of these proposals diminish the reputation of the EU farm support for Kafkaesque complexity, but there is more! At the same time, the other arm of the CAP, its Rural Development Programme, or RDP, is also being reformed. It has a smaller share of resources, also unevenly distributed by member state. In Wales it is predominantly spent on supporting farmers to improve their environmental performance through the Tir Gofal scheme and latterly the recently introduced Glastir successor scheme. Only 13 per cent of the overall total RDP in the EU is spent on what could be recognised as measures supporting the development of non-farm rural communities, and the amount is even less in Wales.

The reform proposals continue a broad focus on improved agricultural competitiveness, better environmental performance – especially carbon management and climate change resilience – and promoting socio-economic development in more peripheral rural areas. However, two new relevant elements have emerged, which are greater flexibility in choosing how support is targeted, and more objective criteria for the distribution of the overall budget. At present, it is mired in further historic precedent – in the UK’s case, much distorted by the Fontainebleau rebate consequences, making its RDP one of the smallest proportionate spends in the whole of the EU.

Determining how all of these proposals will affect Wales is not an easy task. It is made more difficult since the detail of past reforms actually enacted has always diverged, significantly, from the initial European Commission proposals. In 2013 there is even more scope for variation, with 27 rather than 15 countries seeking agreement. A further complication is that this is the first CAP reform to be subject to co-decision, by the European Council representing member state governments, and the directly elected European Parliament.

The possibility of a complete impasse cannot be ruled out. However, the alternative of simply rolling over the old regime payments on a temporary basis, with the issues which motivated the reform festering all the time in the background, means that some kind of messy compromise, loosely conforming to the Commission’s current suggestions, is more likely.

With that in mind, the effects on Wales could be, at worst, more or less neutral overall. At best they could make a significant contribution to an improved economic performance, since the related food and tourism sectors, combined with their linkages to other sectors, form such a large element of aggregate employment and activity.

On any sensible criteria, a redistribution of the RDP resources across the EU would at least double the spend in Wales. With the so-called ‘greening’ of the direct payment system, a more refined and less costly programme of agri-environment support might be required, particularly targeting such things as reducing greenhouse gas emissions and more specific biodiversity objectives. Then, a wise distribution of the extra resources would concentrate on providing infrastructure (physical, social, virtual and expertise-based) to support the rural assets where Wales has an emerging competitive advantages. These include the recreational potential of our widely appreciated landscapes, and the acknowledged recent and continuing quality improvement of food and gastronomy.

There will be obstacles on the road to transforming Welsh rural prospects. However, where these can be transformed into opportunities, their impact can be less damaging. The first is that while on balance the amount of direct support for farming will stay more or less level, there will be the adverse individual consequences of the redistribution of payments between farms of different types, mentioned earlier. Here, there is a clear case for public intervention through the Rural Development Plan.

To offset the negative consequences for the more intensive part of the agricultural sector, development of stronger branding, processing and marketing support can enhance the product prices its farmers receive. However, the nature of that support will be crucial: Despite the downturn it should be focused on high-end niche products that contribute to the generally positive cues among consumers and visitors to the countryside of Wales and its image for environmental quality.

This leads on to a second issue, which is that an appreciation of interdependence between elements and the integration required of the post 2013 Rural Development Plan will be indispensable. In the past, this has effectively been viewed as a convenient back channel, a means of providing counterbalancing payments to farms as successive reductions in direct subsidies have occurred. This urgently needs to change. Ambitious vision, creative use of the new flexibility and resources, and thoughtful and effective application will all be essential for the future Rural Development Plan. With deep cuts in public spending about to affect rural Wales disproportionally seriously compared to almost anywhere else, and with a significant proportion of jobs dependent on the food, tourism and agriculture complex, the stakes are very high.

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Peter Midmore is Professor of Economics at Aberystwyth University. This article originally appeared in the current, Summer 2012 edition of the welsh agenda.

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