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FOOD CHAIN - 5 January 2016

A European policy in need of overhaul or adaptation?

by Yves Madre & Luc Vernet

Reformed in 2014 with the aim of greater clarity and in line with the expectations of European society, is the current CAP a robust policy response to the challenges which the European Union must overcome in the next 15 years?

By tying 30% of direct aid to the issues of environmental sustainability and climate, and considering the resources allocated to rural development policy, the reformed CAP aimed to respond to one of the two faces of sustainability, while maintaining optimisation as a central objective.

The second side of the societal challenge is that of food sustainability; in other words, the challenge of global food security and the responsibility that the European Union must assume in overcoming it.

In responding to this issue, those areas of the world with the capacity to do so, including the European Union, are confronted with a number of same challenges:

  • the challenge of sustainable and consistent agricultural and industrial investments
  • the challenge of integrating innovation and effective technologies
  • the challenge of market volatility, and ensuring that it does not interrupt the continued growth of production.

Understanding the inseparability and mutuality of these two components – environmental sustainability on the one hand, and economic sustainability on the other – is the primary condition for ensuring sustainable development and effective public policy.

Without farmers, there can be no effective environmental management in Europe; without the sustainable management of natural resources, there can be no response to the necessary development of agricultural production.

As it exists today, does the Common Agricultural Policy pass the dual test of economic and environmental efficiency necessary to place the agri-food sector on a path to a renewed and sustainable competitiveness, combining growth, conservation, and modernity?

The world in which we live has changed, and our society is characterised by the fragility of limited natural resources, the dangers of climate change, and the globalisation, volatility, and instability growing in our agricultural and food markets.

In this context, our global agricultural partners have adapted the capacity of their public policies to respond to such threats. While the European Union led a reform which is, above all, social, is has yet to fully address the economic component. To date, the European Union remains committed to the principles and tools stemming from the MacSharry and Fischler reforms.

The breakup of world agricultural markets which took place in 2007 has not yet been accounted for in European agricultural policy. Concurrently, European agricultural productivity has stagnated for two decades, leaving in its wake the comparative competitiveness of European industries.

If CAP simplification is bandied as a magic word, would it not be appropriate to target the efficiency of a policy requiring a new lease of life: more European and more united, more sustainable, more economical, and more modern?

In this context, three key words seem pertinent: Resilience, Sustainability, and Investment.

Market Resilience

Insurance tools, financial tools, regulatory tools: Potential solutions for the strengthened resilience of the European agri-food sector

Key issues:

  • sanitary and climatic risks;
  • market risk (strong price variation, sudden closures of markets due to emerges or loss of consumer confidence);
  • Objectives:
    • Foster European growth, unhindered by one or several of these factors.
    • Promote the sustainability of European agriculture:
      • based on a model firmly rooted in local and familial decision-making centres
      • which fulfils the twofold task of food production and the production of public goods demanded by society.
    • Promote an agriculture simultaneously closer to the level of demand, better able to anticipate consumer trends, and supported by forward-looking investment strategies designed to preserve European agriculture’s existing positions and to win new ones on both domestic and international markets.

Which solutions are currently in place?

  • EU: basic direct payments, coupled payments, public intervention and private storage, emergency measures and crisis reserves, risk management in the CAP’s second pillar (insurance and mutual fund for production risks, income stability measures);
  • Other major world regions: support for production centred on insurance products and margin/price insurance; and/or support based on policies of price guarantees, income tax, tax instruments.
  • What is the relative effectiveness of public policies as instruments of reaction/adjustment to shocks in volatile markets?
    • Budgetary efficiency? The ratio of public budget mobilised and money benefiting farm activity:
      • EU direct support, coupled support: partially captured by land prices, inputs (materials and current inputs), costs of services, downstream effects.
      • Insurance systems: lessons from existing systems: CAN, US, ESP, FR
    • Economic efficiency? reactivity to crises
      • EU direct support: distorting effect on economic reality ßà basic direct support (excluding aids for public goods)? Annual income support and lump sum for each farm:
        • Either fully required in average years for the economic stability of the farm, in which case it cannot be described as a ‘reserve margin’ to deal with market crises
        • Or, in some cases, captured in part by the upstream and downstream of farming activity and, in others, as an incentive to adopt systems of farming which are integrated with current income.
      • EU market regulation tools:
        • Intervention price:
          • Beef: system currently inoperative;
          • milk, cereals: highly disconnected from the development of production costs. Activated by significantly lower market prices than anti-crisis systems of EU competitors.
        • Private storage: a palliative to an ineffective system of public intervention if activation by the Commission is realised at a sufficiently high level of market price, with attractive aid to the cost of storage, in the knowledge that its management should avoid paying for usual private storage not linked with crisis.
        • Crisis reserve and crisis measures: significant reaction time; assessment of measures put in place: a decision based on political impact rather than economic effectiveness; reluctance of services of the Commission to activate the crisis reserve and emergency schemes.
        • 2nd pillar crisis management measures: rudimentary implementation. Analysis of obstacles to the implementation of the income stabilisation tool (non-sectoral, threshold of 30% minimum loss on the farm…)

Which tools should be developed for the future?

  • Future markets: overall response, or a response designed on a sector-specific level and for particular types of farmers?
  • Insurance products (climate and health): what are the additional needs?
  • Tools for the analysis of markets and trends, and reinforced tools for promotion and marketing across all markets?
  • tools to address market crises:
    • income insurance/margin insurance and/or physical management of stocks (intervention, private storage aid)?
      • Physical storage: what is its potential in an open market? Can we combine a system of public intervention and intervention price versus world prices, transportation costs, and EU tariff protection?
    • Level 1 – EU : Guaranteed average production costs? Basic insurance by sector (?), European and free? with a guarantee on the basis of what criteria? :
      • Average gross operating surplus – by production plant?
      • margins?
      • or basic prices?
      • Which levels to define at EU-level?
      • on an individual basis? based on regional indicators? national? European?
      • European interannual budgetary flexibility, or creation of a European fund financed each year by a defined portion of the CAP budget (role of funds: management and control of requests?   borrowing capacity?)
      • Interface for farmers? (via Member States, via insurance firms or banks?)
      • How efficient will these measures be in budgetary terms?
    • Level 2 – EU: to guarantee a preselected positive margin (X%) or a certain income level (X EUR).
      • Additional insurance or mutual funds?
      • Sectoral approach? European devices (unitary or regionalised), or rather national or regional?
      • Level of EU co-financing for each additional margin,revenue, EBITDA, or price (according to a set criteria)?
      • EU’s room to manoeuvre in the WTO
  • A reinsurance system for private insurers?
  • tax treatment of savings in mutual funds?
  • Calibrating levels 1 and 2 and budgetary impact of a ‘redistributive’ CAP between Member States?
  • A balanced and responsible food chain:
    • Capacity of upstream agricultural activities to exercise effective bargaining power within the chain
      • critical analysis of the provisions relating to the most advanced sectors
      • Recommendations for greater efficiency: to what extent a commitment by the industry, and to what extent of a legislative nature?

Possible actions for the short term (reaching full capacity in 2018):

  • Improved food chain law, adjustment for milk and sugar, extension for other sectors.
  • Engage the CAP towards a dynamic policy of guaranteed revenues/EBITDA/margins.
    • Readjust the tools of the 2nd pillar regarding risk management: recalibration
    • Decide on funding transfers from the first to the second CAP pillar of X%, dedicated exclusively to financing risk management tools and support tools and/or strategies of investment to achieve a smart agricultural sector.

Sustainability and Remuneration for Public Goods

  • Which public goods are required and expected by society?
    1. Open rural areas
    2. Production: regional growth and jobs
    3. Related impact on growth of other sectors: tourism, services sector, and industry (with common service providers)
    4. ability to increase production in the face of the global food challenge (geopolitical problem of primary importance)
    5. Responses to the highest demands of European society (welfare, social standards, production standards, GMOs, genetics, growth factors…, rural areas for public enjoyment…, healthy food and nutrition education)
    6. Soil/air/water management:
      1. Environmental quality and the fight against climate change
      2. production capacity for future generations
  • Costs and remuneration:
    1. Not remunerated by today’s market
    2. Unlikely to be remunerated in the short- or medium-term. Opposition between need for public goods and market orientation and related competitions between the different regions of global production (with varying expectations, requirements, and standards) which incite a short term vision of profit maximisation and cost minimisation.
    3. The need to provide compensation to the producer: to legislate without compensation will not be an effective and coherent response. It would involve a loss of biodiversity by a dual movement of concentration and abandonment by zone, and/or a drastic decline in production, contrary to contributing to food security requirements.
      1. Role for public authority, which must assume its social and economic choices and its responsibility for territorial management
  • Possible responses
  1. With regard to the “environmental public goods” component, can we address the need to move towards an objectives-based policy ?
    • What are the conditions and steps to move from an obligatory system of methods defined by rules (with all the complexities linked to the ensuing demands for national flexibility) to a policy instead characterised by the results which it hopes to achieve:
    • In this context, two schemes are conceivable (one being exclusive of the other):
      • Either based on the ergonomics of the current greening policy, to recognise the use of smart agriculture techniques as a means of fulfilling all greening requirements,
      • Or abandon the principles of the rules defining which modes of cultivation are permitted, and instead install farm emissions accounts with a definition of outcomes to be achieved but without prescribing the means of implementation required to do so.
  2. For post-2020, the possibility of developing one single scheme which responds to environmental issues, climate change, and the socio-economic sustainability of certain regions/sectors of weak structural competitiveness:
    • one measure to respond to the challenge of providing public goods at the European level, allowing economic actors to decide and to mobilise the most appropriate means of achieving this.
    • one measure to punctually compensate the costs linked to the commitment to going beyond the basic in order to respond to specific regional issues
    • Support for investments for those going beyond (by necessity or by choice), and to provide (?) limited cash flow support (3 years?) during the period of economic adjustment.
    • one measure to address the structural lack of competitiveness of a region or of a specific sector in a region.
    • A measure to extend the concept of sustainability to the sustainability of consumption patterns, in particular by highlighting the educational and nutritional aspects.
  3. Today: greening carrying binding rules on the means of implementation, agri-environment measures, and aid for disadvantaged zones and sectors: payments for crop management to be implemented or maintained
  4. In terms of the CAP, this would imply :
    • Compensating for the additional costs related to:
      • the shortfalls of regional structural competitiveness
      • environmentally-friendly decisions made by companies which are not compensated by the market
    • Providing timely and limited in time responses to meet the additional challenges by support for necessary investments (material, immaterial, adaptation of structures of production)
  5. Recognise that maintaining and developing agricultural production, acting for the environment and for the climate emergency, and maintaining the values of the EU for agriculture and for European territory are three inseparable facets of the same issue, to be treated together in a common and unified European response?
  6. First scheme: farming techniques ensuring a successful agricultural sector which also meets ‘greening’ requirements.
    • In this context, is it possible to quantify the exact environmental benefits of using different techniques of?
    • If yes, could an overall equivalence to the greening requirements be defined and recognised as soon as a farm puts such techniques into practice ?
    • The rationality of the measure requires that the principle of trust in the individual (the farmer) once again becomes the basis of regulation and enforcement: the requirement would be to held these resources (directly or contractually) as it would go against the interests of the farmer not to implement them.
    • Farmers opting not to take part in the scheme would be required to implement the conventional greening measures (cropping patterns to apply as normal). These ‘classic’ measures are to be reduced in number relative to the measures and flexibilities granted by the existing regulation.
    • If the system is to remain based on the existing principles, the debate called for by NGOS (and for different reasons by certain agricultural organisations of the EU) on the environmental efficiency of the current measures should be managed. Some encourage discourse on the efficiency of the CAP budget, with demands for stricter requirements, which will undoubtedly be audible among politicians and opinion makers, even if their implementation contradicts the desperate need for simplification.
  7. 2nd scheme: Alter the paradigm of the CAP’s basic requirements on the environment and climate change, implementing a system based on farm emissions balance sheets. In this context:
    • This would cut short the idea of a ‘Greening 2’ consisting of reinforced constraints on agricultural practices, instead basing the system on its objective (of mastering/reducing the balance sheet of agricultural emissions) and in giving farmers the freedom to choose the means by which to achieve the defined objective. This involves answering a number of questions.
    • Is it possible, following the example of Ireland, to implement before 2020 at EU level a system of (commercial) agricultural emissions balance sheet? This would provide a clear image of the current situation in order to create an account of the emissions relating to the level of production on each farm.
    • What level of emissions or energy/carbon efficiency of production could become the basis of the environmental requirements of the CAP vis-à-vis farmers?
    • If such an option were considered, in light of the guidelines provided by the European Council of October 2013 on climate change:
      • Which criteria would be used to compare the levels reached by different farms: emissions by tonnes produced? Total balance sheet for carbon (emissions and storage) relating to production… ?
      • Which objectives should be assigned to Member States, and which to farms? Should the reduction efforts be assigned to Member States, allowing them to decide how targets may best be attained at farm level? Or should the CAP rather define the rules for the distribution of the reduction effort between farms?
      • If the reduction effort is managed directly by rules applying at farm level:
        • For farms (A) having ratios of emissions/tonne produced lower than the EU average for said production: decrease in the ratio of emissions per tonne produced of X% over the period?
        • For farms (B) with ratios of emissions per tonne higher than the EU average but less than a given ratio: to succeed by 2027 in reducing emissions to the EU average of the start of the period and a fall of X% over the period (the most ambitious clause applying to those ratios closest to the average).
        • For farms (C) falling above this upper limit, the obligation to fall below a maximum ceiling by the end of the period and to lower their ratio by a minimum of X%.
        • Leave it to farmers to decide upon the means to be implemented in order to achieve these objectives.
      • Implications, controls, and sanctions:
        • Level of aids per hectare; “basic compensation for public goods”’ to vary depending on the assigned category (A), (B), or (C)?
        • Is the annual monitoring of the emissions ratio realistic and practical?
        • Should compliance with commitments incorporate naturally occurring variables (weather, pests…) and thus be based on a triennial average?
        • In case of the alteration of the efficiency of a farm from one category to another (established a year in hindsight), implementation of an adjusted level of aid (with the same one-year gap)?
        • For farms remaining above the maximum ceiling at the end of the period, exclusion from compensation for provision of public goods ?
      • Support for investments made by farms to contribute to the reduction of their emissions: throughout the period, such investments should be eligible for support (co-financing), strengthened in the context of the CAP (see ‘Investments’ section below).
  • For the component on the sustainability of consumption patterns, establish programmes of distribution allowing the delivery of real ‘food stamps’ based on the American model, by promoting healthy eating in schools (school canteens) and public services (hospitals, canteen administrations, etc.), and with distribution to organisations for the poor. These food stamps would be subject to criteria of origin for such purchases.

Possible actions for the short term (reaching full capacity in 2018): Prepare the post-2020 system in order to bring greening into the 21st century as a tool reconciling production and environmental issues in the context of existing legislation:

  • simplify the current greening measures by:
    • reducing the number of available options,
    • revisiting the measures retained to make them clearer, less complex (work on proposals still to do), with an exchange:
  • According to the option chosen for the medium term (Scheme 1 or Scheme 2):
    • establish the requirement of a balance sheet of farm emissions (for those above a threshold of X hectares?) for 1 July 20XX (this date should be included in the period of validity of the current CAP) and decide the ‘sustainability’ options for the following CAP.
    • prepare it in such a way as to show the contributions of production techniques and their relevance regarding environmental quality and biodiversity objectives.
    • establish investments in agriculture as a funding priority, with adjustment of rural development programs and affect a portion of new 2nd pillar funds (see ‘Investments’ section below)
  • Decide on a 2 year extension (?) of the existing CAP regulations to allow a credible period for the preparation of the new configuration (durability as well as resilience and investment), and to ensure its consistence with the calendar of the renewal of the Commission and the EP.

An Investment Policy

Means and direction for continuing on a path to sustainable growth

What are the investment shortfalls by sector in the EU:

  • In meeting the challenge of competitiveness ?
  • In meeting the challenge of sustainability ?
  • Where are the laggards in the EU?
  • Analysis of investment required.
    • For increased productivity/competitiveness: is there a need for a European plan in order to stimulate a technological leap?
    • Costs and lifecycle of these investments, expected return on investment (financial conditions and parameters).
  • What is the current capacity of individual sectors to make these investments?
  • Critical analysis of the current system:
    • What are the existing European strategies for investment?
    • Involvement of sectors in the definition of sectoral investment policies?
    • How relevant are current financial incentives?
    • What support for applicants upstream and downstream of investment?
  • Can we define a European strategy for the catalysis of investments constituting levers for growth:
    • Priority sectors?
    • Which types of investments to prioritise?
    • Scale of intensity of public aid and EU co-funding:
      • Productive investments in sustainability
      • Other investments in sustainability
      • Technological leaps
    • Usefulness of short-term cash flow to support those farms investing? If positive, for which investments, and how?
  • Integrating the new economic environment of increased volatility of markets in need of investment:
  • Which financial tools are required for the making of investments?
    • Bank guarantees
    • Insurance ‘income loss, margin loss’? Analysis of the types of potential measures (taking over annuities, end of annuities, redistribution of capital required, and covering of interest charges)? on which criteria?
    • Role of public support via the CAP?
    • Role of the European Investment Bank, commercial banks, and insurance companies?

Short term actions (to reach full capacity in 2018) :

– Focus on investments considered as the priority for European agriculture (method combining performance and sustainability?) and focus extra resources of 2nd pillar (financed by transfer from 1st to 2nd pillar) only support measures for those investments and for reformed 2nd pillar measures for the management of crises.

Written by Yves Madre & Luc Vernet