Pork Crisis Reveals Strategy Gap around Market Regulation Created by CAP "Health Check"
|18 February 2008 |
Once again the focus of media attention, the pork industry is undergoing an unprecedented crisis that is sowing doubt as to the future of many farms in France.
The crisis began with the spectacular rise in prices for agricultural raw materials, particularly grains, whose prices shot up more than 58 percent over one year, and with farmers' inability to pass on this increase in the final consumer price.
Some specialists are already proclaiming "very serious damage" in the sector, even more so as we move toward dismantling the last regulatory tools under the CAP "Health Check" presented by Mariann Fischer Boel, European Commissioner for Agriculture and Rural Development.
In light of this, the European Commission's recent decision to implement a system of export refunds for three months may seem surprising. Apart from the fact that it highlights the need for regulatory tools and the effectiveness of tools used up to now, it throws into sharp relief the strategy gap in the CAP "health check," which promotes the opposite: eliminating existing regulatory tools without offering relevant alternatives to compensate for market excesses.
According to the Institut Technique du Porc, total production cost for one kilogram of pork has gone up by 30 percent since 2006, increasing from €1.24/kg to €1.60/kg. This places it above the €1.50/kg threshold, which it had not passed in over 20 years. The increase is due in part to rising prices for grain (up 58 percent), which represents 70 percent of pig feed. This devastating combination, which economists call the "scissors effect" (rising costs and dropping retail prices), has plunged the profession into a major crisis.
Over the same period, the retail price of pork dropped nearly 8.6 percent, in large part because of increasing European production (up 2.3 percent), mainly in Spain and Germany.
This factor was emphasized by Michel Barnier, French Minister of Agriculture and Fisheries, in October 2007: "The current pork crisis, one of the most serious that our country has experienced in many years, is in fact due to increases in food-related raw materials prices, which are not reflected in the retail price."
Furthermore, the strong euro is handicapping French pork exports, which represent more than 20 percent of production, according to the Syndicat National du Commerce du Porc (National Union for the Pork Trade).
|Source : Institut Technique du porc (IFIP) |
Faced with such conditions, the pork industry sounded the alarm several times in the second half of 2007.
The responses by Mariann Fischer Boel and Michel Barnier were essentially tied to the current economic climate:
> Last October, the Minister of Agriculture freed up "500,000 euros to reduce expenses and 2 million euros to defer expenses."
> In parallel, the European Commission implemented a regime of private storage aid1 with the goal of delaying the time when pork is put up for sale so as to curb volatility and the fall-off in prices. This mechanism has proven insufficient to resolve the situation: as Fischer Boel observed, "Certainly, prices have stabilized, but they are still very low."
> On November 30, after a great deal of stalling, the European Commission finally implemented a system of export refunds2 for a period of three months.
This fallback by the European Commission demonstrates that:
> Agricultural markets, particularly the pork market, do not self-regulate, which means that regulatory tools must be used. These tools are even more essential in conditions of increased price volatility for agricultural raw materials.
> Existing tools, the relevance of which was called into serious question in Mariann Fischer Boel's "health check," are in fact effective. In fact, the French Ministry of Agriculture and Fisheries has pointed out that the cumulative effects of private storage and refunds made it possible to tackle the 2002/2003 crisis.
> Finally, the European Commission has no alternative, concrete proposal to compensate for the elimination of existing tools, despite their lack of "WTO compatibility."
For now, the pork industry has had to set up a cash flow advance fund, but this measure is very much a product of the current situation. What would happen over the long term, however, if all of the regulatory tools were eliminated and not replaced with an alternative other than that of the market? To date, the European Commission has completely avoided this crucial question, proving once again that the CAP reform is proceeding blindly ahead, without taking into account strategic objectives for the future3.
Experts agree that the crisis should last into the second half of 2008, or even into 2009. Concerned for their future, pig farmers are hoping for a drop in grain prices, but future changes in prices are uncertain.4
As the European Commission moves more firmly into an "all-market" position, nothing is certain and anything could happen - much like a doctor who abandons the vital care he is providing for a patient to instead let time and nature take their course…
WOAgri, which is working for the regulation of agricultural markets, believes that the European Commission has adopted an opportunistic attitude toward this crisis, with no strategic vision. And if, in the future, the CAP is not enhanced with new regulatory tools suited to the specific characteristics of the agricultural markets, Europe will be living at a stop-and-go pace5 that will not satisfy the agricultural world, consumers or even citizens at large.
1 This aid is implemented when market prices fall below a certain percentage of the base price (a pivot price serving to stabilize the market while avoiding surplus production) and are likely to remain at that level.
2 This measure aims to cover the gap between European Community prices and global prices in international trade. It is recognized as running against the rules of the World Trade Organization (WTO), in that it would "artificially" ensure competitiveness for exports, and the European Union committed to no longer relying on it starting in 2013 in the Hong Kong agreements of 2005.
3 See our article, "The CAP Health Check: Six months to adapt a project built on questionable hypotheses!" dated November 27, 2007.
4 See our article in A Look at the News, "Agricultural Price Forecasts Point to Further Uncertainty" dated December 10, 2007.
5 This strategy consists in boosting production during shortages ("Go") and slowing it in case of overproduction ("Stop").