Global food prices and CAP reform [Archived]

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The debate on the EU's future Common Agricultural Policy (CAP) is taking place in the aftermath of spectacular world food price increases in 2007-2008 and amid bankruptcy warnings from EU farmers, who are worried about attempts to liberalise global trade in agricultural products.

Background

No single factor to blame for food price rise 

Agricultural prices rose sharply in 2007-2008 and are forecast to remain high, at least in the medium term. 

There are many reasons put forward to explain rising food prices. These range from changing eating habits to trade restrictions and climate change.

While there are more mouths to feed as the world's population grows, increased demand for meat and dairy products from rapidly growing economies, particularly China and India, further increases the overall pressure on the price of grain used to feed livestock instead of being consumed by humans directly.

The use of food crops for biofuels, such as maize for bioethanol, as well as EU and US subsidies for biofuel production, are said to subject grain for human food to further competition. Other factors affecting grain prices include poor harvests, varying crop yields and environmental pressures caused by an increasingly variable climate, as well as higher fertiliser, energy and transport costs due to surging oil prices. 

Speculation in commodity markets helped by low global food stocks are also singled out for driving up food prices. Subsidies, concentration of important agricultural markets in the hands of a few firms, trade restrictions by important exporters to protect domestic consumers, depreciation of the US dollar and lower productivity growth due to low investment in agricultural research are also said to affect the price of food.

As for price formation, the shelf price of foodstuffs is influenced by the cost of energy, transport, processing and labour, and much less so by changes in farm-gate prices. According to the European Commission, agricultural ingredients represent only 5% of the final cost of a loaf of bread, for example.

Role of CAP

The EU's Common Agricultural Policy (CAP) was established in 1958 to subsidise farmers, encouraging them to produce more to ensure stable supplies of affordable food. Once self-sufficiency for food was achieved in the 1980s, the policy began to lead to almost permanent surpluses of basic farm commodities, referred to as 'butter mountains' or 'wine lakes', which were bought up in the interest of food security.

By agreeing to conduct a CAP Health Check in late 2008, the European Commission stressed that the EU had taken "decisive steps" towards more market liberalisation. Reforms agreed as part of the Health Check include the abolition of set-aside areas in arable land, the gradual phasing-out of milk quotas and "the conversion of market intervention into a genuine safety net". 

The EU executive believes that these measures will help farmers respond to changing market conditions, as decoupled direct payments leave them free to produce what the market is asking for. 

However, the commitment to abolish milk quotas, for example, has led to unforeseen protests by milk producers, who claim strict regulations limiting production are needed to keep them in business. 

Soaring global food prices in 2007-2008 have prompted a renewed debate about maintaining sufficient subsidies to the EU farming sector, as some argue that feeding people cannot be left to the mercy of the market. 

Issues

EU response

EU response

As global prices hit new highs, the European Commission sold its intervention stocks, removed the obligation to set aside 10% of arable land for the 2008 harvest, increased milk quotas by 2% and suspended import duties on cereals. The plan is to abolish set-aside forever, significantly reducing the role of market intervention, and to phase out milk quotas gradually between now and 2015. The EU executive also notes that "almost all remaining production-linked subsidies will be eliminated, so that farmers have complete freedom to produce what the market requires". 

Furthermore, the Commission proposed policy measures aimed at improving market transparency (EURACTIV 11/12/09). It decided to enhance monitoring of developments in agricultural markets and analyse the impact of price speculation. The EU executive also announced plans to investigate the functioning of the food supply chain for potential unfair commercial practices, which may be holding back competition and driving up prices. 

A review of national and EU-level regulations that hinder the proper functioning of the food supply chain was also initiated, in an attempt to identify regulations that restrict the entry of new companies into the market, prevent business from fully competing and distort the relationship between suppliers and retailers. 

The results, published in October 2009, highlight "significant imbalances" in contractual relations between actors in the food supply chain and a lack of transparency of prices along the chain (EURACTIV 28/10/09). A European food price monitoring tool is being set up to increase transparency. 

Overall, the Commission's policy to address rising global food prices comprises three strands of action:

  • Mitigating short and medium-term effects of the food price shock by monitoring price developments and speculative investments, changing the CAP, acting on behalf of the poor and investigating the functioning of the food supply chain. 
  • Increasing agricultural supply and ensuring food security in the longer term by strengthening the sustainability of EU and global policies on biofuels, boosting agricultural research to increase productivity and maintaining an "open but vigilant" GMO policy, and; 
  • Contributing to the global effort to help the poor by promoting an open trade policy and concluding the Doha round of World Trade Organisation (WTO) talks, offering humanitarian aid and supporting agricultural and rural development policy changes in developing countries.

Subsidies to keep farmers in business 

One of the major issues for debate in the upcoming reform is the role and function of the post-2013 direct payments scheme to support farmers' income. 

The Commission believes that a "basic income safety net" is still needed post-2013 in order to guarantee EU farmers a stable income and incite them to continue production. But it underlines that subsidies should not act as regular price-setters, as this prevents farmers from reacting quickly to market changes and hampers the price competitiveness of European agri-food products. 

The EU executive is also investigating the possibility of making direct payments subject to the delivery of environmental 'public goods' via sustainable farming practices (EURACTIV 27/10/09).

Annual EU farm subsidies of €55 billion stand accused, along with their US counterparts, of hindering developing countries' potential for agricultural development. The CAP is also criticised for keeping food prices in Europe artificially high, as import tariffs make agricultural commodities of foreign origin more expensive.

Meanwhile, export subsidies help EU farmers to sell their surplus production to world markets below the cost of production, reducing the net cost for foreign buyers of EU agricultural products.

While these subsidies secure a stable income for EU and US farmers, critics argue that floor prices encourage overproduction and that the main beneficiaries of subsidy payments are not farmers, but large agri-business firms. Access to a steady supply of cheap farm commodities reduces these firms' costs and boosts their profits, the argument goes.

Producing more to curb prices

In the Commission's view, "the best cure" for high food prices is the incentive to increase production created by the prospect of higher returns. Indeed, many parts of the world still have huge production potential, especially Kazakhstan, Russia and Ukraine. 

Around 21 million hectares of land used for cereal production dropped out of use when the Soviet Union split up. According to the UN Food and Agriculture Organisation (FAO), Russia could potentially increase its grain yield by 45%, Kazakhstan by 60% and Ukraine by 70%. 

However, producing more on new farmland might in some areas conflict with the need to protect the environment.

The 2007-2008 food price crisis also pushed several Asian and Middle Eastern countries, which are short of land and water, to buy farmland in developing countries to secure their food supplies. While the phenomenon of 'land-grabbing' has the potential to trigger much-needed investment in agriculture and rural areas in developing countries, critics have dubbed the practice 'neo-colonialism' and sounded the alarm over the impact of such land deals on local people and farmers, whose access to land is compromised. 

Another way to increase production is to produce more from existing land. However, this represents a challenge, as overall growth in agricultural productivity has fallen since the Green Revolution of the 1960s and 1970s, and increased biofuel production diverts agricultural land away from food production. The current average grain yield in the developing world is also less than half that of Western levels, according to the FAO.

Both the European Commission and the FAO believe agricultural research should be strengthened to boost sustainable growth of agricultural productivity, via new crop varietiesm improved cropping systems with higher and more stable yields, more efficient water use, greater resistance to diseases and environmental stress, and less need for pesticides.

The EU executive notes that the use of genetically-modified (GM) crops, a highly controversial issue in Europe, can increase productivity and "may be particularly important in regions of the world which suffer from difficult climatic conditions," where GM crops can help mitigate the effects of the food crisis. 

Global trade modelling

The EU advocates an open trade policy and the conclusion of Doha round of World Trade Organisation (WTO) talks. However, the Doha negotiations on freeing up global trade, launched by the WTO in late 2001, have repeatedly failed due to the reluctance of the EU and US to cut their agricultural tariffs and subsidies. 

Meanwhile, some economists argue that concluding the Doha negotiations would only increase agricultural price volatility, fuel speculation and worsen food security in developing countries. They say that only a few emerging export countries, like Brazil, would really benefit from liberalised global trade in farm products. 

Momagri, a French agricultural think-tank, calls for the creation of a new international economic model which takes due account of the impact of price volatility and speculation on food security (EURACTIV 17/06/09). It argues that it does not make sense to liberalise agriculture, which provides income for 40% of the world's population, when only 7%-8% of global agricultural production is traded. 

Momagri's model for a new world order suggests dividing the world into zones according to regional development levels: North America/Mexico, South America, the EU, China, India, Africa, Russia/Ukraine/Kazakhstan, North Africa/Near and Middle East, the rest of Asia and the rest of the world. Agricultural trade could then be completely liberalised within each of these zones. 

According to the think-tank, the creation of such regional trading blocs would "allow measuring of the real consequences of liberalising agricultural markets for each zone, while taking into account their own specificities in terms of risk exposure, so that we can determine winners and losers". 

Positions

The European Commission insists that there is no connection between EU agricultural subsidies and rising food prices, and stresses that the CAP is much less trade-distorting than the American policy. 

Meanwhile, EU member states' views vary greatly on the matter, suggesting that a difficult debate lies ahead on the size and precise role of direct EU support for farmers in the post-2013 era. While countries like the UK and Denmark are in favour of reducing the overall CAP budget drastically and allocating more funding to rural development and the provision of public goods, others want to see the retention of a strong CAP in the current context of declining farming income and rising food prices, including France and Greece.

UK Finance Minister Alistair Darling recently called for an end to "all elements of the CAP that are designed to keep EU agriculture prices above world market levels," saying it was "unacceptable that at a time of significant food price inflation, the EU continues to apply very high import tariffs to many agricultural commodities". 

But former French Agriculture Minister Michel Barnier  argues that CAP subsidies are not to blame for the hike in food prices and that the EU example should even serve as a model for regional versions of the CAP in Africa and Latin America. Barnier argues that such schemes would help the developing world to achieve self-sufficiency and combat soaring food prices (EURACTIV 29/04/09). 

Barnier believes the food price crisis highlighted the persistent need for the CAP, describing it as the "cornerstone of the continent's food security". 

France rejects the idea of reviving the Doha talks to liberalise trade in agricultural products, and argues that Europe must instead step up its efforts to become self-sufficient in food. 

Momagri, a French think-tank which promotes a new global vision for agriculture, argues that "heightened and unregulated liberalisation of agricultural trade would lead to renewed increases in food prices and even greater price volatility". It calls for a two-step approach to liberalising trade in agricultural products, whereby trade would be fully freed up within pre-defined sub-regions: North America/Mexico, South America, the EU, China, India, Africa, Russia/Ukraine/Kazakhstan, North Africa/Near and Middle East, the rest of Asia and the rest of the world.

The UN Food and Agriculture Organisation  (FAO) notes that while Organisation for Economic Co-operation and Development (OECD) countries have traditionally protected their agriculture sectors heavily with subsidies and trade policies, "these support and protection policies affected above all the trade performance (changed market shares) as well as consumers (paying higher prices) and the taxpayers (paying the subsidies) of the OECD countries themselves". 

The FAO therefore argues that agricultural trade liberalisation would result in high-income countries gaining the "lion's share of gains in welfare" together with some developing-country exporters of competing products. Meanwhile, some developing countries which enjoy preferential access to protected markets and those that have few agricultural exports but import much of their food - like the ACP countries, which enjoy preferential agreements with the EU - could be harmed, it says. 

The European Parliament  argues that "although the funding of the CAP has contributed over the years to securing low consumer prices, it is noticeable that consumer prices remain high or are not falling despite the fall in prices in the agricultural sector". 

The Parliament believes that within the framework of the CAP, market-management measures are called for to provide stability for the agricultural sector and the agri-food market, and to maintain sustainable EU agricultural production at reasonable prices.

MEPs also consider "an imbalance in the food chain" to be among the causes of prices differences at source and at the final destination, and regret that the EU lacks adequate measures "to encourage producers' organisations, through cooperatives or other organisations, to promote supply concentration". Such concentration, they believe, would result in "a better organisation of the market and increased negotiating strength for producers vis-à-vis the other links in the food chain".

EuroCommerce, which represents the European retail, wholesale and international trade sectors, states that "commerce wholly rejects any implication that responsibility for recent price increases should lie at its door or that it is failing to pass price decreases on to consumers". 

EuroCommerce Secretary-General Xavier Durieu  said "the price transmission issue is highly complex and largely depends on the degree of competition throughout the supply chain".

Farmers  and agri-cooperatives  across Europe, represented by Copa-Cogeca, deplore that producer prices for many agricultural products have fallen substantially while the cost of production has risen sharply. They also stress that farmers are not to blame for consumer price increases.

The lobby notes that farmers "receive a declining share of the price consumers pay for food in the shops" and that the share is "often not sufficient to cover their costs, never mind give them a fair income". 

"Farmers and their cooperatives are now up against the huge buying power of a handful of supermarkets," Copa-Cogeca states. The lobby group argues that the EU's CAP helps provide farmers with payments to cover additional costs and helps them to become more competitive by helping them to modernise their farms. 

The CAP can also can provide tools for risk management regarding price volatility and "ensure market forces do not spin out of control", it said.

A study by the Humboldt University of Berlin, co-sponsored by the European Crop Protection Association (ECPA), a pesticides industry lobby, argues that Europe needs to increase agricultural productivity to respond to rising food prices. It notes that global food supply cannot keep pace with growing demand, as globally available agricultural land is limited in scale and the most productive land is already being farmed. 

"Where land reserves exist, they often should not be used for farming because of environmental reasons. Consequently, to meet the needs of the rapidly growing world population, the necessary production growth will have to come to a very large extent from a growth in productivity of the land already being farmed today," the study concludes. 

It further argues that the EU "will be less affected by climate change" than other world regions and that Europe will become a "more secure production location in comparison to other world regions". Therefore, it urges the Union to take responsibility and "significantly contribute to world food security, capitalise on its production potential and employ strategies which increase overall agricultural productivity on the available agricultural land".

"We cannot expect to increase agricultural productivity without having a full range of modern farming tools available: from new breeding techniques to crop protection products," argues Claudia Michel, senior manager for agriculture, environment and food policy at the European Crop Protection Association (ECPA). "These tools increase productivity, secure yields, reduce crop losses and therefore help provide a sufficient and sustainable supply of fresh fruits and vegetables to farmers throughout the world," she added. 

According to Syngenta, a Swiss plant science and breeding company, increased food production and opening up markets, both domestically and abroad, can help address high food prices in the long run. 

In Syngenta's eyes, such action would be "preferable to food aid," although direct aid can be relevant in the short run and where natural and governance disasters interfere with efforts to intensify production and supply, the company stated. 

Mark Titterington, European public affairs director at Syngenta, said "it is absolutely necessary to grow high-quality affordable food with less environmental impact," which he says is possible thanks to technology and knowledge. 

However, in order to achieve this goal, farmers need a system of incentives that the market does not provide, he said. Such incentives could be provided by making public sector payments to farmers for services that are not market-priced, such as biodiversity and landscape management. 

Titterington believes that the upcoming CAP reform presents an opportunity to say that "farmers need to grow more from less". If they are to do this, they need access to technology and know-how, he argues. Increased EU investment in agricultural research is also needed, as well as a "more joined-up approach from the Commission's department for agriculture and environment". 

The International Assessment of Agricultural Science and Technology for Development (IAASTD), a World Bank initiative, notes in its first global report on the state of agriculture that "an increase and strengthening of Agricultural Knowledge, Science and Technology (AKST) towards agro-ecological sciences will contribute to addressing environmental issues while maintaining and increasing productivity". 

This can be done by moving towards a "more resource-efficient and site-specific agriculture," and facilitated by technological options such as new genotypes of crops, livestock, fish and trees and advances in plant, livestock and fish breeding, biotechnology, remote sensing, agroecology, agroforestry, integrated pest and nutrient management as well as information and communication technologies (ICTs), the report said.

Environmental NGO WWF  believes many complex structural causes contribute to the price crisis, "but many of these revolve around the question of how we use and treat the planet we live in". According to WWF, the way forward involves producing more rice with less water, using protected areas to secure food, reducing hunger without increasing thirst, and promoting sustainable fishing. 

Greenpeace argues that food shortages, unaffordable food prices and hunger are primarily a result of industrial farming, bad harvests related to climate change, unjust terms of trade and the rush for biofuels. 

ActionAid, an international anti-poverty agency, is urging the UN to look at how speculation on agricultural commodities can be curbed. It is expecting concrete measures to stabilise prices or control speculation - such as increasing food buffer stocks, limiting trading positions, raising margin deposit requirements, or taxing speculative transactions. 

Magdalena Kropiwnicka, food policy analyst at ActionAid, said "stable agricultural markets, where prices reflect real supply and demand conditions, are essential if agricultural systems in developing countries are to be rebuilt, and if developing countries are to enter regional or global markets for agricultural commodities on fair terms". 

Timeline

  • Nov2007-2008: Rise in global commodity prices.
  • 20 May 2008: Commission Communication on tackling challenge of rising food prices.
  • 9 Dec. 2008: Commission proposes roadmap for national and EU action on food prices.
  • 17-18 March 2009: Second Forum for the Future of Agriculture
  • July 2009: Franco-German working group created to frame the EU's CAP reform (EURACTIV 06/07/09).
  • 28 Oct. 2009: Commission Communication on a better functioning food supply chain in Europe.
  • 2009: Start of discussions on the EU's future long-term budget after 2013, giving indications as to the scope of the future CAP.
  • 2009: WTO attempts to revive Doha round talks. 
  • 12-13 Oct. 2009How to Feed the World in 2050: High-level expert forum in Rome.
  • 16-18 Nov. 2009World Summit on Food Security in Rome.
  • 12. April 2010: Launch of a public debate on the EU's future farm policy.
  • Nov. 2010: Commission communication on the CAP towards 2020.
  • Nov. 2011: Commission to submit formal legal proposals on detailed CAP reform for negotiation by EU ministers. 
  • 2014: New CAP due to enter into force.

Further Reading

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