The text that follows represents momagri’s contribution to the Conference on the Common Agricultural Policy after 2013 chaired by Dacian Ciolos, the EU Commissioner for Agriculture and Rural Development. It addresses the following broad themes of the Conference:
• Why do we need a common agricultural policy in Europe?
Once again, the public debate seems to confirm the trends brought to light by the survey on “What Europeans think of agriculture and the CAP”1 that was published this past March. For 90 percent of the people interviewed, “agriculture and rural areas are vital issues for Europe’s future”.
• What do citizens expect from agriculture?
• Why reform the CAP?
• What tools do we need for the CAP of tomorrow?
The survey’s results, as well as contributions to the public debate, are indicative of the enormity of the task awaiting the European Commission.
How must we define a new European agricultural policy that meets at the same time the highly strategic nature of issues relating to agriculture, the sometimes-contradictory expectations of citizens, and the agricultural crisis? To make matters worse, the equation must be solved in an environment of global instability and latent crisis of the European Union.
momagri feels that only a paradigm shift is required to allow the study of new systems to fight the key bane of our economies––risk and uncertainty. We are not talking about coming back to managed economies, but about public/private regulations that take effect in cases of hyper-volatility.
While momagri welcomes the statements made by European political leaders for a strong CAP––particularly for our food security––there is a long way to go before we can dare believe that other avenues exist.
Let us hope that the approach initiated by Dacian Ciolos will facilitate the emergence of a new vision for European agriculture. An analysis of the many contributions will be given at a public conference to be held in Brussels on July 19 and 20, 2010.
Why do we need a common agricultural policy?
1. Because agriculture is a specific sector that needs an agricultural policy to allow farmers to make a living from their work and to retain an agricultural potential in the EU.
Agriculture is a sector that operates in a specific way: Farmers have no advance knowledge of production volumes, product quality and selling prices.
One or two percent of positive or negative variation in global production can lead to price fluctuations of several dozens of percentage points, because in agriculture supply does not automatically adjust to supply, and vice-versa. How can farmers endure such price fluctuations?
In fact, agricultural markets are not self-regulating. They are structurally imperfect and subjected to a unique combination of natural risks (such as climate hazards and epizootic diseases) as well as market risks (uncertainty on production volumes and their selling prices, growing uncontrolled impact of speculation on agricultural exchanges), that only an agricultural policy can administer,
Agriculture is also an economic sector where dumping––selling at prices below production costs––has become an institution. Global prices are the result of a lowest bidder rationale at the international level and do not reflect production costs.
Consequently, farmers are selling their products at prices that often no longer cover production costs. Subsidies sometimes represent over half of farmers’ income. Yet, they would prefer making a living from their work, rather than from subsidies.
Lastly, European farmers are bearing the brunt of the distortions generated by unfair competition concerning some imported products. In fact, many of these imports are produced in social, environmental and sanitary conditions that are well below those required in the E.U.
If farmers are no longer making a living from their trade, we may soon fear a deterioration of the agricultural production potential, which will certainly impact the food security for 500 million consumers. Since agriculture’s primary mission is to feed mankind, the goal of an agricultural policy is thus to allow farmers to durably and efficiently produce quality goods.
2. It should also be noted that agriculture, which is at the heart of strategic issues (food security, economic development, the environment and economic growth), has again become an issue of power in the 21st century.
Agriculture has again become an issue of power for nations. Of course, food security and the environment immediately come to mind.
So do quite a number of other concerns, as stated by Hillary Clinton on September 24, 2009, when she said, “Food security is not just about food, but it is about all areas of security.”
While the CAP has for a long time been designed on the basis of purely European considerations, it is now time to understand that powers such as Russia, China, India, Brazil and the United States, have a very precise strategy for their agriculture––the sector is again a factor of political independence and power.
What do citizens expect from agriculture?
The March 2010 Eurobarometer showed that citizens broadly support the CAP and European farmers. In spite of urbanization and changing lifestyles, they continue to recognize the significance of agriculture.
Why? Because contrary to other economic sectors, agriculture plays a fundamental role in the citizens’ daily life, chiefly by providing them safe agricultural products.
The listing of citizens’ expectations is a long one. The think tank momagri has collected the following priority topics from its contacts with representatives from the third sector:
- Food that is affordable and sufficient.
This is the hope of the 20 million Europeans for whom the issue of knowing if they will have enough to eat to satisfy their hunger remains a reality. Let’s not forget either that over one billion men, women and children are suffering from hunger worldwide.
- Protection of countryside.
Maintaining the countryside is an integral part of farmers’ work. Markets do not pay the costs of these services rendered to the community. If in the absence of agricultural activities, farmers no longer perform this mission, it will be much more costly for the community to hire the employees to carry out the task.
- Wholesome, diversified and traceable foods.
Wholesome, because citizens are increasingly well informed on issues contributing to their health and fighting obesity.
- Employment and dynamic rural areas.
Diversified, because European agriculture reflects our culture. Agreeing to the extinction of local agricultural activities in favor of concentrating production in countries with lower wages will lead to standardization and the disappearance of some agricultural products.
Traceable, because allowing the relocation of agricultural production to nations outside the EU will subject the European population to new sanitary risks, whose financial and societal costs will be very high.
According to Eurostat, the European Union has already recorded the loss of 3.7 million agricultural jobs between 2000 and 2009. Some studies indicate that Europe can still lose 20 percent of its agricultural production, that is to say €70 billion and four million jobs…
- Products that do not “travel” thousands of miles before reaching our plates.
In this respect, a comparison with Argentina’s agriculture would mean that 80 percent of French agricultural land is farmed by only 700 farmers, an average of seven farmers per département! Is this what we wish for Europe’s agriculture?
- Products that were not grown at the expense of the environment, animal welfare or labor standards.
Why reform the CAP?
According to momagri, the list of stated objectives behind the creation of the CAP are still current, but they must be updated. Among the many reasons calling for CAP reform, we would pay particular attention on the following points:
1. Reforming the CAP is needed to allow farmers to make a living from their work.
Without European subsidies, many farmers would have discontinued farming. Worse even, these subsidies are no longer covering production costs and farmers are losing money “each morning as they go to work”.
We are confronted with a long-term trend of lower revenues, as income dropped by close to 20 percent during the past decade. And one of our studies shows that it could be even worse if markets were to be totally liberalized tomorrow, without any parallel regulatory mechanism.
If this trend continues, we will observe the extinction of many farms, and with them the loss of product diversity. Farmers want a reform that will provide them with both visibility and price stability.
Indeed, farmers would prefer to make a living from their work than rely on subsidies.
Yet, the current CAP does not get to the root of the problem, that is to say agricultural price volatility and a benchmark global price, which is a dumping price resulting from unfair competition.
2. Reforming the CAP is required to fight price volatility and excessive speculation.
If the CAP reform does not tackle these two sources of instability––volatility and excessive speculation––we must expect crises whose costs will be very steep, as it is always the case in situations of instability (like the financial crisis).
Today, one recognizes that market “laisser-faire” leads to increased price volatility and excessive speculation.
Lastly, it should be noted that the financialization of agriculture strengthens the development of systemic risks. It is observed that out of an average of 20 transactions in futures markets, 19 of them are strictly financial operations, which means that only one produces a physical delivery. The recent financial crisis should bring into focus the risks it implies for agricultural stability.
The CAP reform must include these scenarios to define mechanisms to correct the destabilizing consequences of increased price volatility.
As another highly destabilizing phenomenon, increased speculation in agricultural commodity markets means that we should not subject agriculture to the sole market forces, at the risk of jeopardizing all farmers and our food security.
These phenomena should lead us to design agricultural market regulatory tools, without which we will remain exposed to large-scale crises. Regulation involves a set of diversified measures adapted to the multiple facets of crises that can affect farmers.
3. A CAP reform is urgently needed to safeguard food security for Europeans and to avoid putting the EU in a situation of reliance on other powers.
We are now living in an international environment, which has been weakened by the financial crisis and subjected to increased risks, which compels us to design a food security policy.
In addition, the position of nations such as China, Russia, Brazil and the United States… which should alert the European Union on the risk to find itself, a few years from now, dependent for its food supply.
Let’s never forget that food insecurity is the basis of political and social unrest.
4. The CAP reform is mandatory, as it is currently a policy guided by budgetary restrictions rather than strategic objectives.
Reforming the CAP for purely budgetary reasons is a political error for the future of food security and food independence for all Europeans.
While some advance the fact that the CAP is expensive, it would be relevant to know the accurate amounts of expenditures. Because we always observe a difference between voted budgets and final payments. Which means that actual budget would be about 32 percent, instead of the posted 40 percent.
Last but not least, do we know the actual cost of the agricultural crises we have been experiencing in the EU for the past several months?
The current phase of CAP reform gives us the opportunity to return to the strategic objectives and place again the agricultural and food policy at the rank it deserves.
What tools do we need for the CAP of tomorrow?
1. momagri considers that Europe must adopt a new vision for agriculture that primarily involves answering the four following questions:
- What is the health status of European and international agricultural markets, and how should they evolve?
In fact, it is difficult to propose a pertinent political and budgetary framework without a preliminary audit to assess both European and international stakes and threats. It is thus essential to have an instrument to assess the complexity of agricultural markets and their exposure to risks. This is the reason why the think tank momagri designed the momagri model, the first economic model to simulate international agricultural markets, and to incorporate the many specific characters of agriculture, such as the structural price volatility of agriculrural commodities.
- What precise strategic course for European agriculture?
Just as Europe was structured around a clear and strategic vision for agriculture, it is now crucial to provide European cooperation with a new lease on life. The think tank momagri considers that European agriculture is a highly strategic activity that must be equipped with a common agricultural policy that integrates tomorrow’s challenges. Consequently, it involves incorporating, for instance, the extra-European strategies conducted by other large agricultural powerhouses.
- On what principles should tomorrow’s CAP be based?
momagri has outlined several principles that could guide the reflections on CAP reform, as well as global agricultural and food governance. The implementation of these principles should allow meeting the following objectives:
- What means of action must we adopt to meet these objectives?
- Lucrative prices, stable income and protection against dumping prices;
- Adequate budgets to meet the many challenges of the future;
- Effective protection against systemic risks that can affect tomorrow’s agricultural markets, just like what we experienced in 2008 in financial markets;
- Development of the European agricultural potential to prevent the EU to rely on outside countries, as it is already the case for energy;
- Impetus of a new dynamic process for the European Union to restart its economic and political power;
- Better anticipation of trend turnarounds and of European and international agricultural market crises.
The European Union must adopt means of actions that are adapted to the new international environment, which is chiefly defined by agricultural market financialization and increasing volatility. But national and European leeway is more tenuous than in the past, and mechanisms to be implemented must be able to regulate markets without impeding their operations or promoting protectionist responses. The regulation principles advocated by momagri have been devised to do so––to concretely remedy to the breakdowns of European agricultural markets while allowing farmers to make a living from their activity without resorting to subsidies and increasing public financial aid. To facilitate the implementation of these principles and improve the quality of available data, momagri established a rating agency, whose mission, among others, will be to assess the health status of agricultural markets thanks to strategic indicators tailored to current issues.
2. Most of all, momagri’s proposals aim to fight excessive price volatility and to stabilize farmers’ income.
As previously indicated, the fundamental issue that must be addressed is that of the visibility that can be given to farmers, since it conditions everything else. With this in mind, momagri sponsors the following organizational principles that could inspire the future CAP:
• Equilibrium prices must be set, per agricultural product and per large homogenous economic zone in the framework of a yearly agreement. Determining these prices would be based on relevant economic parameters and include negotiated possible fluctuation ranges. As long as prices would remain within these fluctuation ranges, governments would not intervene and would only grant specific aids related to strategic objectives, such as food security for instance.
• If assessed prices deviate from these free variation range (the “snake in the tunnel”), a mandatory consultation process will be initiated and the European Union will take immediate intervention measures to regulate markets and fight speculative drifts, such as:
• The implementation of regulatory measures (tariffs, decrees on farmland and financial instruments),
3. Thanks to such system:
• The public management of reserves of concerned agricultural products, with concerted stockholding and release mechanisms.
- The agricultural community will get better visibility, since it will know that, in case of crisis and in a context of consensus, public authorities will soften market fits and starts, which in turn will prevent crises by deterring excessive speculation;
4. These principles are leading us to question the permanence of Single Payment Schemes (SPSs), which are too remote from production activities and whose effectiveness might no longer have any connection to targeted objectives.
- Public intervention measures will be solely limited to times of crises, thus curbing agricultural policy costs;
- The public community will not intervene within the limits of free market price variations (that could be significant), except for specific aids (temporary support to ailing sectors, innovation, land and environmental preservation…).
It would thus be more justifiable that SPSs be otherwise earmarked in the future CAP:
- They will first finance intervention tools to maintain prices within the “tunnel”;
- As complement within the tunnel, they could provide financial incentives allowing farmers to take “income insurance”. These private insurance policies would differ according to productions and European concerns. Farmers would thus regain full responsibility within zones of free fluctuation price.