The European Parliament Adopts the Lyon Report,
A breakthrough for CAP Reform
Expert of momagri
While Dacian Ciolos, the European Commissioner for Agricultural and Rural Development, is scheduled to present his first guiding principles for CAP reform in the fall of 2010, the European Parliament Committee for Agriculture and Rural Development dealt with the issue as early as the start of the year, with the objective to fully play its role of “co-legislator” in accordance with the Lisbon Treaty.
In fact, European Parliament Members (MEPs) now have “the power to take an active part in designing the EU agricultural policy.” Acting in this framework, they took an initial stand on July 8, by adopting a first report on the future of the post-2013 common agricultural policy presented by George Lyon, MEP from the U.K. and member of the Alliance of Liberals and Democrats for Europe (ALDE). What does one take away from this report?
The report shows that European Parliament Members are considering agriculture to be a strategic sector that fully justifies a EU policy.
Although the text introduces a break from the thinking that prevailed when Mariann Fischer Boel was the previous Commissioner, and includes significant progresses, momagri nevertheless feels that the report’s propositions will require to be amended in the up-coming months.
Indeed, additional work must still be conducted to design regulation mechanisms that, while maintaining free market operations would provide decent revenues to farmers through balanced market prices on one hand, and on the other prevent situation of market price hyper-volatility. This hyper-volatility is the bane that threatens most farmers, the whole agribusiness industry and, in fine, our food security.
According to momagri, this is the priority item to be solved, because without minimal price stability, the measures of contract agreement and insurance will not help farmers to make a living from their work and fulfill their food security mission.
I - The George Lyon report reflects a change in MEPs’ mentalities and an awareness of the strategic nature of agriculture.
As one reads the report, it is important to keep in mind the every adopted text is primarily in line with a context. In this case: The 2007-08 food riots, the 2007-08 agricultural price hyper-volatility, the 2008 financial and economic turmoil, and more recently the agricultural crisis, the drop in agricultural revenues, and lastly the stalemate in the Doha Round talks.
Members of the European Parliament––no matter their political membership––have taken into account a portion of the deep-rooted trends generated by these events:
1. Frailty of food security,
That is the way George Lyon openly asserted the stakes presented by agriculture for the future of the European Union and the rest of the world. “The CAP of the future will have to meet new and pressing challenges; It must also provide a framework for the future based on stability, predictability and flexibility in times of crisis.” (Preamble). One will never say it enough, “As global food security is expected to double between now and 2050 to meet the world population increase, global food production will need to increase accordingly.” (Background B).
2. Market lapses to regulate instability situations,
3. Agriculture’s added value in terms of economic growth and jobs,
4. And the negative consequences of the unfettered liberalization of international agricultural trade, especially on agricultural price volatility.
“Rediscovering” agriculture and its ties with food security does not date from this report. As early as 2008, Irish MEP Maired McGuinness had called her colleagues’ attention to the fact that “the CAP [must] remain the cornerstone of the European Union policy on food security.” That being so, George Lyon deserves the credit for bringing back some concepts that had been forgotten––or even worse discredited––for the past several years 1 :
a) Agriculture remains a central sector for the European economy, making a valuable contribution to the EU GDP and employment, directly and indirectly, through the multiplier effect on both upstream and downstream agribusiness markets … (Article 22)
Yet, it had been years since “agriculture” no longer rhymed with “growth” and “employment” in our leaders’ minds. Quite contrary, the prevailing view rather had a propensity to sacrifice the number of agricultural assets on the altar of “profitability”. European agriculture––the base of agribusiness industries that are directly related to it––can again become an engine of growth and a source of jobs. This represents the issue at stake for the new CAP.
b) European agriculture must remain competitive against cutthroat competition and trade-distorted measures on the part of trade partners and/or countries where farmers are not subject to standards as high as those in the European Union (…); It must ensure that the EU has a wide range of high-value food and other diversified agricultural products, which continue to capture a greater share of the world market, while ensuring fair trade and remunerative prices for farmers. (Article 38)
Remunerative prices for farmers are in fact a required foundation. They establish a virtuous circle that allows investment and, through innovation, improvement of both agricultural productivity and product quality. While competitiveness has been a stated objective of the European Commission for several years, Europeans tend to forget that their competition very often gets as much––if not more––support. And this helps them to generate lower prices on global markets.
For a long time, the CAP helped enabled to produce more with increasing high quality for ever-lowering prices, thus benefitting farmers as well as consumers. What is left of regulation mechanisms can no longer sustain this. In the current state of things, this represents a model that:
- Either does not last long, as farms go into bankruptcies;
The facts concerning actual spending are even more striking, since they only represent 0.38 percent of GDP, against 0.45 percent of earmarked amounts.
- Or generates a type of restructuring that leaves European agriculture no longer meeting citizens’ expectations, while creating massive job losses.
c) The share of CAP expenditures in he EU budget has been decreasing… to represent less than 0.45 percent of the European Union GDP; considering that the reduction in budgetary expenses tied to market measures makes an even greater impact––from 74 percent of the CAP in 1992 to less than 10 percent currently…
In fact, the CAP has become a budgetary management policy, while all large political powerhouses worldwide (such as Russia, India and China) are positioning agriculture at the heart of their strategic policies. It is therefore urgent to reverse the rationale and apply the needed means to the development of a genuine political strategy to ensure food security for European citizens, while respecting their socio-regional expectations.
d) Farmers need long-term investment prospects and adequate incomes to carry out their tasks. Consequently, this calls for the guarantee of fair and stable returns for the farming community to remain one of the key goals for the new CAP […] while enabling farmers to cover their real costs […] (Article 41)
The first key relates to market prices that must be, as previously seen, remunerative. The second one concerns mastering production costs. The topic is still a new one, in spite of the fact that it symbolizes farmers’ daily life in these times of lowered prices. Why? Is it because many are considering that everything is “a matter of competitiveness”? Is this topic the responsibility of entrepreneurs, but not that of political leaders? Europe often lays down heavy constraints for its farmers with regards to the ability of Europeans to compensate required efforts.
Indeed, some Member States do not hesitate to enact measures to lessen the consequences. Since 1991, the German Government has been granting some agricultural activities with a total exemption of labor charges. The system works so well for the meat transformation industry in particular, that French, Danish or Dutch agribusinesses are shipping their “carcasses” across borders. Even if it is evident, this is indeed proof that farmers’ competitiveness also relies on the national environment in which they operate.
The issue of income and covering actual costs is therefore a question to be addressed in defining the future CAP, and this does not involve coming back to managed prices but designing new regulation. This must not be a taboo subject!
momagri is convinced that we must implement an equilibrium price system per great agricultural product that would be based on average production costs, fluctuating within a tunnel and thus allowing a market economy to play its part (Cf. III). This would allow for better budget management and would provide margins to conduct new regional policies.
II – An influential text that deserves the credit for breaking with the prevailing guiding principles on strategic issues, such as budgets, agricultural market operations and security of food supply.
We are mentioning below only three topics related to budgets, agricultural market operations and security of food supply.
a) We must “safeguard” the budget earmarked for the CAP and refuse any renationalization.
“So that the CAP can meet the new priorities and the expectations of all EU member States, the CAP budget amount needs to be at least maintained at 2013 levels in the context of the new financial perspectives.” (Preamble)
[…] The future European agricultural policy must remain a common policy and only a balanced and fair system of support across the EU […] can deliver the appropriate conditions for farmers […], thus achieving greater value for the money than could be delivered by renationalized, and eventually conflicting, agricultural policies in individual Member States. (Article 28)
momagri welcomes this position that is a complete break with J.M. Barroso’s November 2009 “non-paper”, which advocated a clear cut in the budget earmarked for the CAP.
Still, it will necessary that the MEPs’ stance be validated by the studies to be conducted in the up-coming weeks by the special committee on political challenges, whose mission is defining the political priorities for the next long-term framework of the future CAP.
It will then be the turn of the budget committee to decide. For some analysts, the long-term financial framework could not be presented for a final vote before 2014––a year of new European Parliament elections––which would allow newly-elected MEPs to command a budget they voted upon, and not approved by the previous legislature.
As a result, some rumors are implying that the actual CAP reform could be achieved by 2016 only!
As we note the progress achieved during one year, we can hope that our European leaders will make the most of the many months to come to “again debate, learn, study the impact surveys, and take advice before proposing precise guidelines”, in accordance with the wise words expressed by Maired McGuinness.
[…]Agriculture is a specific sector that is marked by a long-term production cycle and suffers from several types of market failures such as extreme market volatility, great exposure to natural disasters, a high level of risk, a lack of demand elasticity, and the fact that farmers are ‘price-takers’ rather than ‘price-makers’ in the food-supply chain.” (Article 26)
These statements show that MEPs are taking into account one of the specific characters of agriculture. This is quite a new approach in official European views, since recognizing the shortcomings of agricultural markets is unfortunately far from gathering unanimous support among experts. At best––when they admit it––they point out that agriculture is not the only sector to experience such malfunctions. One thing is certain: Agriculture is nevertheless the activity on which our food security relies.
Additionally, Bertrand Munier2, momagri chief economist, has given conclusive proof that agriculture is subject to four simultaneous risks that similarly affect no other sector:
- Prices are much more volatile than industrial or service-sector prices, leading to extremely difficult forecasting;
Other issues must also be addressed in the up-coming months, especially regarding the impact of liberalization and speculation on agricultural prices.
- Current investment decisions (and not only investment decisions) made in year “t-1” are almost totally irreversible up to the “t” year;
- One is confronted to both the production of physical goods as well as final and conditional (derivatives) future markets, theoretically allowing complete or partial coverage, but speculation as well;
- Agricultural production strongly hinges upon natural hazards (climate, epizootic diseases…).
c) The European Union cannot shrink from its commitments to global food security, or rely on other areas of the globe for the security of its own food supply.
[…] European agriculture must guarantee the security of food supply for its own consumers and contribute to feeding a global population that keeps increasing (Preamble)
[…]The lack of a common agricultural policy […] would lead to the development of unsustainable modes of production across the EU […] causing serious damage to the environment. One must insist on the fact that the cost of support through a strong CAP is nothing compared to the costs of no action and its negative unintended consequences. (Aarticle 36)
The goal of food security––although stated in the CAP charter texts––were somewhat forgotten during these past few years and replaced by sole environmental considerations.
momagri is indeed grateful that MEPs are again addressing the issue, although it regrets that:
- The tie between the CAP and the EU food security is not more clearly established;
III – A minimum work platform that generates new thinking to design pertinent regulation.
- No objective in terms of food security for the EU is stated;
- The agricultural strategies of the world large powerhouses, aiming to either ensure their food security or make agriculture a true trump card in international relations, are not valued at their true worth.
Contrary to expectations when we consider how sensitive is the issue of reforming the CAP, George Lyon conclusively “rallied and received an overwhelming backing” for his report.
How did he achieve it?
For momagri, the report was able to create a consensus for a “minimum ideal” to “avoid reactions of reject.”
momagri recognizes that that George Lyon’s decision is a sign of a considerable progress, since the necessary mind changes to truly build up a CAP reform will take time––time for studies and analyses as well as time for education and persuasion.
The report decisively sets “a different scene” from the one prevailing up to now. Having said that, it is urgent to pave the way for truly new decisions, and not adapt existing ones.
momagri is disappointed about the vagueness surrounding some propositions. George Lyon did not include any precise recommendation on what he calls “market measures”, “safety net”, “risk management system”, nor does he specify the presence of risk management, as indicated by the following Articles 43 and 82:
- “Implement flexible and efficient market measures to ensure an adequate safety net […] in order to avoid extreme market price volatility, impart a greater degree of stability and provide rapid and effective responses to economic crises arising in the sector; We take the view that this should be complemented by a risk management system that helps minimize the consequences of natural and health disasters.”
- “These measures should be backed by instruments designed to help reduce volatility and provide stable conditions for agricultural business and planning; in this context, we take the view that new innovative economic and financial tools, such as across-the-board harvest risk insurance policies, future markets and mutualization funds should also be considered as a way to deal with extreme market or climate conditions […]” (Article 82)
Yet, it is crucial to go into detail on what is covered by “extreme conditions”, in order to devise pertinent measures in reply.
In this respect, momagri proposes a scheme in which the level of “acceptable” volatility would be defined––a type of tunnel in which prices would fluctuate without public intervention, excepted for specific incentives relating to cost overruns generated by environmental conditions and flat support for risk insurance.
Conversely, when prices would come out of the tunnel, upward or downward, public intervention measures could be initiated. The goal would be to protect farmers from unsustainable low prices, as well as protect consumers and the agribusiness chain from high prices unrelated to economic reality, as it can occur in cases of strong speculation on high prices.
Lastly, momagri underscores its difference with several assertions:
- No, the common agricultural policy was not successful in meeting every goal set in the Rome Treaty. If this was true only a few years ago, it is no longer the case concerning the objective of fair standard of living for farmers. In France only, average farming incomes dropped by 32 percent in 2009, following a 20 percent drop the previous year. For the EU-27, the recorded average slump is around 12.2 percent. No other activity would accept such income variations!
- No, the financial support to farmers per individual in the European Union is not comparable to that of its main trading partners, such as the United States (as per the opinion of the Budget Committee, Suggestion D), even if Item R of the Preamble tempers this view by indicating that “other trading partners have maintained and even increased trade-distortion subsidies over the last few years.” To break with some misconceptions and benefit from more reliable assessment bases, momagri has built a new indicator to measure the level of agricultural support and will publish its first results in the fall. Because, current existing indicators do not include variables such as:
. The level of domestic food aid, which is considered a measure for the circulation of agricultural products in the United States,
- No, the global results of reforms conducted since 1992 are not positive, as shown by the crisis faced by the agricultural community and by the EU reliance on outside nations for some products, such as vegetal proteins, and by losses of export market shares.
. The consequence of currency and monetary policies, which significantly impact export
competitiveness. Aerospace executives are quite aware of this!
The final report has in fact toned down this position and settled by recalling that “reforms conducted in 1992, 1999 and 2003 were created to help farmers… better meet… market conditions.”
Nothing proves that said reforms did strength the EU agricultural potential. Many players are requesting impact studies that would help better evaluate its economic and social consequences.
- No, [current] CAP market tools […] are no longer playing a central role […] helping market volatility […] to provide farmers with some degree of stability. What was true in the past is no longer so today!
While reforming the CAP is of course required for a lot of valid reasons, momagri appeals to the political responsibility of European institutions to place at the heart of the CAP mechanisms to efficiently fight price hyper-volatility and provide farmers with adequate revenues giving them a valid outlook for the future.
momagri stands ready to work with MEPs, pursuant to the work put into George Lyon’s report that, let’s not forget it, represents a genuine progress on many issues such as those related to public goods, which are now frequently backed by many players, especially NGOs. Although this opinion takes on a genuine real significance, yet one must not restrict it to environmental preservation but also include food security and a renewable carbon policy.
The report concludes on the need for “Pilot Projects and Preparatory Actions [that] could also serve in the future as a platform for testing new ideas for reforms.”
momagri is working with the European Parliament and other European institutions to bring its contribution to the exiting task to charter a new future for our farmers and our countryside.
A significant and necessary step has just been taken, but it is only a step. Let’s meet a year from now to gauge the necessary progress that must be achieved.
About George Lyon
A British MEP and member of the Alliance of Liberals and Democrats for Europe, George Lyon was assigned the preparation of the report of the post-2013 Common Agricultural Policy by the Agriculture Committee of the European Parliament.
George Lyon is also responsible for a 1,350-acre farm located on Scotland’s Isle of Bute.
1 We are mentioning here only a few articles. The entire report can be downloaded at the following address: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A7-2010-0204+0+DOC+PDF+V0//EN&language=EN
2 “An X-ray of the risk module within the momagri model”, by Professor Bertrand Munier, April 14, 2008.