LFMI answers to the Consultation document for impact assessment of the reform of the CAP towards 2020

Combined answers to questions 1, 2 and 3.

CAP is flawed from the beginning and ineffective in achieving its goals

As the consultation paper indicates, current CAP policy does not meet the objective of ensuring fair living standards for the agricultural community. However the whole definition of “fair living standards” is ambiguous and debatable. “Fair living standards” are not defined objectively. Therefore the expectations change with general development of the economy. What might have been considered “fair living standards” during the creation of CAP, may not be the same now. So the objective was flawed to begin with.

If we define “fair living standards” as “average living standards” then statistics show that in countries with long CAP experience (EU-15) the income from agricultural activity has fluctuated on par with general economic performance. But it is not evidence that CAP has ensured this in agricultural sector. In other sectors of the economy the average wages have also moved on par with the economy. Therefore it is plausible that wages in agricultural sector would had followed the general trend even without the CAP.

In the new EU members states the pattern has been similar. When comparing income in agriculture and other sectors it seems that average incomes in agriculture are less than the average incomes[1]. In new member states the incomes in agriculture are less than the average incomes and much less than in manufacturing. Although it is difficult to draw meaningful insights without factoring in the differences in the quality of labor force and other factors, the overall picture is the same: incomes in agriculture are lower than averages; incomes in rural areas are lower than in urban ones. Whether the situation would be better or worse without CAP is a difficult question. But it is clear that majority of sectors of economy are performing just as well or better without extensive CAP-like programs. This suggests that in the long term incomes in agriculture would follow the general economic performance (or do even better) even if CAP is phased out.

CAP hurts consumers via higher food prices and taxes. It has been established that CAP hurts the consumers just like any other protectionist measure. First, the consumers suffer from import restriction and thus higher prices in the domestic marker. Second, CAP spends taxpayers’ money on subsidies to farmers therefore the taxpayers pay too much tax. Third, there are always alternatives where to use the tax revenue that currently goes to CAP.

Some argue that these are not really costs, because import tariffs and taxes are transferred. In reality this is irrelevant because money is being taken from individuals who could have used it for more productive activities. Instead this money is taken by the government and given to the agricultural sector. Therefore the consumers are hurt; the final destination of the transfers is of no importance. Moreover, even if we accepted the standard neoclassical explanation that transfers are not losses, we must acknowledge the deadweight losses associated with import tariffs and taxes.

Furthermore CAP is a major obstacle to agreements on free trade. This has far reaching negative effects on global development and European welfare. Countless studies highlight the negative effects of CAP on European consumers and farmers in less developed countries.

CAP is ineffective tool at preventing fluctuations of the market prices for food products for European consumers. Statistics do not show any discernable evidence that CAP has prevented the rise of food prices in Europe. Europeans are protected from effects of fluctuations of food prices not by CAP but by high incomes. In other words the fluctuations of food prices are not that harmful to the Europeans simply because Europeans are wealthy. This is especially obvious when comparing EU-15 and EU-12. Rise of food prices in a much more sensitive in poorer EU-12 states despite the sharing of CAP.

In some cases rigid rules of CAP prevent farmers from reacting to market forces and switching to more demanded products.

There are more cost-effective methods to ensure high quality of food for European customers. First, the quality of food is a matter of consumer choice. There is no justification for forcing customers to buy “higher quality” but more expensive food. Second, the supposed need for “high quality” food can be met by applying food quality standards for domestic and imported production. The system of EU-wide standards would be more cost-efficient than the CAP system. Third, the specific goal to ensure high quality of food for European customers has never been an official goal of the CAP policy.

Agriculture in EU is suffering from excessive state intervention. While other sectors are pushing forward and becoming more productive and innovative, agriculture simply transfers higher input costs to the final price. The consultation paper conceded that there is a situation with rising prices for food and decreasing margins or agricultural business in the same time. This would suggest that European agriculture needs better management, more effective investment and general restructuring. In this context CAP is not a facilitator of change but a hindrance.

The objectives of CAP reform can be met more efficiently by other means

The objectives of CAP reform (1) Maintaining the agricultural production capacity throughout the EU and (2) Ensuring the provision of environmental public goods such as the sustainable management of natural resources and the preservation of the countryside can be met more cost-effectively through means other than CAP-like government spending.

The first objective of maintaining production capacity is debatable. Exactly how much productive capacity is needed is determined by the market forces. There is no basis for assertion that the current capacity is the optimal capacity for Europe. Moreover the CAP measures are directed at preventing overcapacity in Europe, suggesting that there is already too much productive capacity. Therefore we have a certain paradox: trying to reduce and maintain productive capacity at the same time. These conflicting goals are an illustration of the arbitrariness of CAP.

As discussed in the consultation document, maintaining or expanding the agricultural capacity in Europe requires for the sector to become truly sustainable. The paper concedes that European agriculture needs more modern management, cost cutting and entrepreneurship. If the purpose of the CAP reform is to make European agriculture truly sustainable we need not to reform, but to phase out CAP. Removal of CAP would force cost cutting since producers would not be also to rely on subsidies. This cost cutting would attract modern management, entrepreneurship and restructure the sector much better than the CAP reform.

The second objective is of debatable relevance since it is hard to even agree on what it tries to achieve (“provision of environmental public goods sustainable management of natural resources and the preservation of the countryside”). Nonetheless “sustainable management of natural resources” is best achieved through clearly defined property rights and a sound legal system. Preservation of the countryside can be accomplished by public (or private) money purposefully directed at preserving the sites or areas of significance. In other words, if the objective is to preserve the countryside, subsidies for industrialized agriculture are hardly the appropriate means. If some of the direst predictions about the reduction of land used for agriculture in absence of CAP were to come true, we would have an expansion of natural state of nature. After all many areas of what now is arable land were reclaimed form wetlands and other natural habitats.

It should not be forgotten the often used term “sustainability” does not refer to any particular method of farming but rather to the practices that can be sustained in the future (or indefinitely). Only the market conditions can set a meaningful ratio between land used for wildlife and agriculture. Phasing out CAP would have an extra benefit of correcting the ratios between farmland and woodland. If there isn’t demand for European agricultural products some assets would be left unused and revert to their natural state. Spontaneous examples of this happening were seen in Eastern Europe after the collapse of communism. In other countries e.g. UK, CAP funds are used to return farmlands back into wetlands. Both of these measures lead to the same result. The only difference is that one is free and other one is not. If cost effectiveness is a virtue, abandoning CAP is a much better alternative than reforming it.

The only sound reform – to phase out CAP

We should not try to accommodate the defunct system of CAP to ever more hostile environment. Instead we should direct all efforts to the creation of a sound exit mechanism from the CAP and rural development policies while annually reducing the contributions to the EU budget by the amount previously allocated to these policies.

There is hardly any social or economic justification for the CAP and rural development programs. Attempting to create a “good” CAP is a waste of time and other limited resources. Given the deep-rooted tradition of financial support for the agricultural sector there would be a huge resistance to the abolition of all funding; thus all efforts should be focused on the creation of a sound exit mechanism from the CAP. One of the solutions could be an automatic reduction of the size of the budget together with gradually diminishing payments to agro-producers.

We should reduce the contributions to the EU budget by the amount presently allocated to the CAP and rural development programs. This redefinition of budget revenue and expenditure, especially of the CAP and Cohesion policy, would allow the EU to retain GNI as a revenue source and to reduce the contribution amount to 0.5 %.

Given that the competitiveness of the agricultural sector is hampered by the high compliance costs of EU quality and environment protection requirements, there is an urgent need for deregulation of the agricultural sector.

It needs to be stressed that the abolition of common agricultural policies does not mean agricultural funding should be shifted to the national level. National support to the agricultural sector needs to be treated as state aid to any other sector of the economy is; thus, it must not be tolerated.

[1] Other studies claim that average income in agriculture is higher than the country average. The most likely explanation is that different studies compare different things: wages vsall income from the agricultural sector. Nonetheless the made argument remains: we do not know what the situation would be like without CAP