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“The CAP in the face of the economic and financial crisis”
While the international community is actively committed to defining a set of measures to curb the world economic recession and boost economic growth, a recent study by the European Parliament, Directorate-General for Internal Policies1, has examined the impact of the crisis on agriculture. At the same time, it questions the relevance of the CAP’s Health Check within a context of increasing instability.
This study was entrusted to the Directorate-General for Internal Policies, which submitted its conclusions in March 2009. It confirms the European Parliament’s increasing interest in this strategic sector three months after the McGuinness Report and the resolution which bears the same name. 2
The study, which is entitled
“The CAP in the face of the economic and financial crisis” , highlights a certain consensus among experts on persistent price fluctuations in the future, especially when they are exacerbated by the recession. It is a worrisome premise, considering the European Union’s scheduled progressive removal of its regulatory mechanisms, as last November’s CAP Health Check illustrates.
The following is an overview of the Parliament’s study.
1. The impact of the recession on agricultural markets
Cyclical factors are regularly cited to explain the reversal in the price trend of essential agricultural products reported from mid-2008. On the one hand, there has been an increase in the quantities produced, as a result of larger production areas and favorable climatic conditions. On the other hand, trade restrictions imposed by certain exporting countries have been relaxed following the 2008 price surge.
While all these factors have undoubtedly caused the price of agricultural products to fall, they are not sufficient to explain the extent of the reversal of this trend, as the European Parliament has highlighted. Non-agricultural factors have also played a major role, particularly the slowing down of the world economy, which has impacted the agricultural sector in many ways:
> The brutal fall in energy prices since May 2008, which has “slowed additional demand for agricultural products used for energy purposes [and calls into question] the measures of substituting fossil fuels with biofuels”; The study noted: “A number of conclusions can be drawn at this stage. Firstly, the recession has confirmed the systematic volatility of agricultural prices. The likely reduction of customs tariffs, as envisaged for the Doha Round, will add its weight to this factor in the future. Moreover, climate change analyses suggest that abnormal climatic conditions will probably become more severe, and could make production that is concentrated in a few regions of the planet even more volatile due to recurrent deficits.”
> The drying up of liquidity flows on the derived agricultural products market. Speculation on the futures market, one of the factors behind the 2008 surge in agricultural prices, has lessened, thereby affecting the fall in the price of agricultural assets exchanged on the futures markets;
> The fall in global food consumption, ”which has exacerbated the instability of the agricultural markets (supply/demand), and which also explains why food prices have gone down.”
Under these conditions, it is logical to question the relevance of the decisions made during the CAP Health Check, as the European Parliament has done.
2. The future of the CAP in the face of unstable agricultural markets and price volatility
“The systematic instability of the agricultural product markets has always been at the heart of agricultural policies,” and in particular the CAP, which more than any other European or national public policy, “has always been characterized by intensive market regulations and supervision mechanisms.”
Nonetheless, in keeping with the deregulation trend initiated around ten years ago, the last CAP “Health Check” has relaxed the regimes for the regulation and control of the present supply. Between the intervention, limited in quantitative terms for milk and wheat, its abolition of pork, barley and sorghum and the removal of milk quotas by 2014/2015, the CAP has slowly lost all its mechanisms on which its regulatory capacity over agricultural markets was based.
The European Parliament’s questioning of the situation is legitimate when we consider the context of increasing instability which comes as a result of the worldwide recession: “even though public intervention has become a safety net for major Community production outlets, a question hangs over whether the Council’s decisions provide a response to the current market requirements. Unfortunately, the EU has lost the ability to retain strategic stocks of commodities that could act to soften the blow vis-à-vis internal EU price differences. Moreover, production conditions and the absence of storage capacities in Russia and Ukraine could lead to mass substitution of EU cereals by produce from these countries, thereby exacerbating the internal imbalances.”
Even though it has not addressed the impact of the crisis on agricultural revenues, the study notes, this impact is difficult to quantify, but still merits “special attention” from leaders.
The latest simulations of the Momagri module fully justify some fears: according to the latest results obtained in March 2009, and as the G20 highlighted, the unregulated liberalization of exchanges on the agricultural markets will mean a reduction in farmers’ revenues all over the world, except for net exporters of agricultural products (e.g. Brazil), which will be the only ones to benefit from the situation. Some zones will see their farmers’ revenues fall by up to 60% in the poorest countries (Africa).
The conclusions of the study by the European Parliament should also be credited for asking the right questions at the right time, because as it indicates, “the recession undoubtedly reasserts the value of the stabilizing role that the CAP aid plays, especially within a context of lack of liquidity and credit restriction.”
We hope that the economic and financial crisis that is currently battering the international community provide political decision-makers with an opportunity to reorient public policies in the right direction. The agricultural markets need stabilization policies in the same way that the financial markets need regulations; and it’s about time people realized this.
|1 " The CAP in the face of the economic and financial crisis ", http://www.europarl.europa.eu/activities/committees/studies/download.do?language=fr&file=25068|
2 See momagri, "McGuinness Report: An encouraging step forward, requiring further support", 09/02/2009, http://www.momagri.org/UK/Points-of-view/McGuinness-Report-An-encouraging-step-forward-requiring-further-support_435.html