SPEECH/04/311

Dr. Franz FISCHLER

Member of the European Commission responsible for Agriculture, Rural Development and Fisheries

The impact of CAP reform

Meeting with NGOs Brussels, 18 June 2004

Thank you for coming to this meeting where I tend to briefly cover the state of play of CAP reform, its relevance domestically but especially internationally, and its linkage to the ongoing negotiations in the context of the DDA. The process of CAP reform is well known to all of you and I dont feel I need to describe it in any detail. Although it is true that both the reform of 2003 and the more recent one covering the Mediterranean products will be implemented during the 2005-2007 period, and some variations do exist among Member States, the overall direction and extent of the reform leaves no doubt about its scope: At the end of the reform process the bulk of our support would have moved away from product support to direct producer support. Most of the latter would be in the form of decoupled payments, i.e. payments to the farm for the provision of public goods. The provision of these public goods are guaranteed by cross-compliance, i.e. the respect of all these standards, be it environmental, animal welfare, food safety or quality standards. Rural development would be strengthened both with the shift of funds away from market and direct aid support towards rural development measures and more importantly with the strengthening of the instruments available through rural development programmes. The balance of support available to our new Member States would reflect their real needs and priorities for restructuring and for wider measures supporting their rural communities. The product coverage of CAP reform would include almost all sectors of EU agriculture, with the notable exception of sugar (for which a proposal will soon be available).

Even the most ardent critics of the CAP admit that this process is clearly significant. Yet, depending on the point of view of the various stakeholders, we have also heard arguments suggesting that either we have gone too far (admittedly such argument are more confined to the farming or agribusiness community) or that we have not gone far enough (an argument obviously coming from outside the farming community). With all due respect to these arguments, I think it is meaningless to attempt to debate or evaluate the impact of CAP reform in abstract terms; too far or not far enough with respect to what? In my view the best way to evaluate the impact of CAP reform is with respect to the clear objectives we have set out to achieve: The CAP makes EU agriculture clearly more competitive than before. The significant cut in support prices in all reformed sectors (Graph 1) has bridged the gap between our internal prices and world market prices, while decoupling would lead our producers to shift more freely towards what they can produce best. Their product would thus be of higher quality, further increasing the competitiveness of our agriculture.

The CAP makes EU agriculture clearly more environmentally friendly. Cross-compliance does not only imply reductions or even zero direct payments if producers do not respect standards. New rural developments policy instruments, new funds for rural development, and producer support that is decoupled from production (and thus from the need to intensify production methods) all imply a significant reorientation of incentives that enhance the positive contribution of agriculture to the environment. The CAP is clearly more acceptable domestically. Its reform has been demand-driven, reflecting all the priorities that our citizens have identified as relevant to our policy objectives. It has also been driven by the need to maximise the efficiency of the policy instruments we use, the manner in other words by which we support our farmers, given the budgetary constraint we face, thus rendering the value for money argument relevant in the whole CAP reform process. The CAP is also clearly more acceptable in the international context. The best way to judge that is not by evaluating it on the basis of slogans, by definition clearly more capable of catching the eye, but often prone to missing the point, but by evaluating its real impact in the context of the DDA negotiation. CAP reform has not only provided us with additional margin in all three pillars domestic support, market access and export subsidies - but it has clearly changed both the nature of the debate and the balance among negotiating parties (to this point I will come later).

You could obviously argue that this is what you would expect to hear from somebody who has pushed these reforms through. So let me now try to argue from a different angle, not based on what we have been saying and doing but based on the criticisms we have been hearing about the CAP and its alleged failures. I do not intend to repeat here the list of such criticisms which, as you know, could be long. I would only like to focus on what seem to me the most credible of such criticisms, at least with respect to the often legitimate concerns they reflect, although sometimes these concerns are accompanied by inappropriate solutions. I would summarise these criticisms by focusing on three areas, linked to the three pillars of the WTO negotiations in agriculture I mentioned earlier. In such a way, I could try to put them into perspective with what is clearly a very timely issue, the state of play of the DDA. The most evident point of CAP criticism related to domestic support is the alleged cost of the CAP. But here I think that, instead of going into details, one should go straight to the point. To what are we comparing these costs? To me the only relevant comparison is that of the cost of the CAP with respect to the overall cost of public expenditure in the EU, less than 1% (Graph 2) for 7% of the population; and the facts are very clear. Not only is the share of CAP in EU GDP small and declining (from 0,54% of GDP 10 years ago to 0,43% today, going towards 0,33 % by 2013), but this share is also declining much faster than EU public expenditure (3 times faster during the last decade). That all this is happening while we increased our membership from 12 to 25 demonstrates to me the crucial point. That the real issue is not how much is spent on the CAP but where this money goes and how it is spent.

Looking at the CAP cost evolution during the last two decades clearly shows the significant shift in the manner this support is given, starting in 1992 (Graph 3): less for export subsidies, less for market support (intervention stocks and the like) and more direct aid to producers and to rural development; and that before we even start the implementation of the recent reforms. The impact of the latter reforms on the CAP cost structure is evident from Graph 4; even less will be spent in the future for market support, less for product-specific direct aids, and more (most of the support) will go to decoupled payments. This is exactly the path of policy reform consistent will less trade-distortion based on previous OECD analysis (Graph 5). And since it is around this time of the year when misinterpretations of OECD indicators are so common, a reminder: this exactly the policy reform path whose impact you will not see by looking at OECDs PSE. As our wheat example demonstrates (Graph 6), reductions in our domestic support price, export subsidies manner or tariffs have had no impact on the EU PSE for wheat (or other commodities) because the PSE aggregates the composition of support (not just subsidies), but does not measure its trade distorting impact. One more visible impact of CAP reform has nevertheless been on our position on domestic support in the context of the current state of negotiations in DDA. No-one focuses anymore on how to discipline CAP domestic support. Rather the issue is how to force reform of US farm policies, while at the same time respecting within the modalities framework the significant contribution of CAP reform in bringing down trade distorting support. I would like to turn now to the external impact of CAP reform, and especially to its impact for on developing countries. To use as reference the other two pillars of agricultural agreement, the issues at stake here are related to the impact of our exports and of our export subsidies on world markets (the alleged dumping issue) and to our contribution to opening up our market for the developing world. And what we need here is to move away from a competition of how to dump more slogans and to focus on the real factors that determine developments in world markets. This is not so much necessary for the CAP, but for preparing the developing countries themselves for the real challenges they have to face. Let me start with the export side, focusing on one development that is very clear from a simple look at the facts: the EU net-export position has declined in every single sector since 1990 (Graphs 7 and 8). This has been not been the result of some accident but of the combined and cumulative impact of the reform process: lower domestic support prices also result in lower market prices, decreasing the exportable surplus by both lower production and higher consumption. They also result in lower export subsidies. How can then one seriously defend the so-called dumping assertion when clearly the implication of lower exports is also lower pressure on world-market prices? I think one of the fundamental problems is the lack of any serious discussion on the factors determining world prices. Let me use as an example two sectors that are often used as proof of the detrimental effect of developed country policies for developing countries sugar and cotton.

In sugar the dramatic increase of the exportable surplus in Brazil almost exclusively explains the decline in world market prices (Graph 9). In cotton fluctuations in netimports of China (a major player not only in cotton but also in synthetics) coincide with major fluctuations that characterise world prices in that sector (Graph 10). Does this imply that we do not need to reform developed country policies in these sectors? On the contrary, both for domestic but also for international reasons neither we nor the US can afford not to reform - we have done so in cotton and hope that the US does the same. I will soon propose to do the same in sugar, and I hope that others follow here as well. But we should have no illusions that by isolating one factor and focusing almost exclusively all debate on it, exaggerating in the process its real impact on world markets, would in the final analysis benefit developing countries. The world is too complex to fit into such a simplistic scheme, too colourful to be limited by black and white analyses. Yet despite its complexity, the world is certainly ready for a move into one area related to export policies, that of the complete elimination of all forms of export subsidisation: EU export subsidies, disciplined from the previous round and declining, but still trade-distorting, form; US export credits or food aid for surplus disposal, which without any disciplines have assumed a major role of trade distortions in recent years; single-desk sellers retaining export monopolies and all sorts of government guarantees; differential export taxes, used to distort the composition of exports.

All these forms should have to go in full parallelism. Their elimination would certainly not harm developing countries, as some now started to claim. Clearly defined rules allowing action in emergency situations do not require product or origin specificity. They require the clear identification of needs and a clear share of responsibilities of meeting these needs. Finally a few words on market access - few not because the issue is of less importance but it is of such complexity that we could spend hours discussing it. It is clear that in the current state of play of the DDA negotiations on the modalities framework for agriculture, the issue has become the trickiest to resolve. In a sense this is to be expected. Market access affects all WTO members, not just the two big elephants and some other developed countries as domestic supports and export subsidies do. It also affects both importers and exporters, with diametrically opposed interest and sensitivities. Finally it affects developing countries in a very complex manner. In addition, not only are most of the benefits from market opening going to come from increased opportunities for trade among the developing countries themselves, but most of the fears about the impact of trade liberalisation come from developing countries. But, whatever the outcome of the negotiations on how we need to reflect all this complexity in a modalities framework, there can be no doubt about the importance and contribution of market access in the EU for developing countries. The fact that the EU is by far the largest market of agricultural exports from the developing countries is the proof, thanks to the series of preferential access arrangements in place.

And our Everything But Arms agreement ensures that products from the least developed countries can enter the EU market duty and quota free. What we would like to see now is other developed countries following a similar approach, or at the very least allowing 50% of developing country exports to enter their markets duty free. But above all we would like to see in the negotiations a formula able to deliver the same extent of detail as we expect in the other two pillars if an agreement of a modalities framework is to be agreed by July. Priorities and sensitivities are obviously very varied across this pillar, hence the need to come up with a formula that can deliver a meaningful compromise. And what the EU is keen to ensure here is that sensitive products are determined by the parties concerned, and not automatically; that the final formula for tariff reductions takes account of these sensitive products; that the final result is a single system that unilaterally addresses the need to make significant improvements in market access.; and that the developing countries, in particular the least developed, receive special and differential treatment. I think I have by now covered enough space! So I would like to thank you for your attention and turn to you for your comments. Annex : The Common Agricultural Policy : reform and relevance for the developing world.

The Common Agricultural Policy:

reform and relevance for the developing world
Franz Fischler
European Commissioner Responsible for Agriculture, Rural Development and Fisheries

Brussels, 18 June 2004

Meeting with NGOs

1. EU price support reductions

0 -15 -30 -45 -60 -75 Soft wheat Durum wheat Rice Beef Butter SM Powder

% reduction

Support price reduction

2
Brussels, 18 June 2004 Meeting with NGOs 2

2. The cost of the CAP in perspective

Cost of the CAP (relative terms)
50% 40% 30% 20% 10% 0% Share of GDP CAP expenditure All EU public expenditure
3
Brussels, 18 June 2004 Meeting with NGOs 3

CAP cost in perspective

CAP costs indicate a clear trend:

a declining share in EU GDP (from 0.54% to 0.43% to 0.33%) a declining share in EU budget a declining share in EU public expenditure a significant shift in manner of support

3. The evolution of CAP expenditure

50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 billion
EU-10 EU-12 EU-15

Export subsidies

Market support
4

Direct aids

Rural development

Brussels, 18 June 2004

Meeting with NGOs

4. CAP budget support trend

40 30 20 10 0
1993 Market measures Area/animal payments 2000 2008 Single Farm Payment (minimum from 2003/2004 reforms)
5
Brussels, 18 June 2004 Meeting with NGOs 5

billion

5. OECD evaluation of policies

Payments on Historical Entitlements Payments on Area Planted/Animals

Output Payments

Input Payments

Market Price Support

0,00

0,25

0,50 0,75 Trade Effects, MPS=1

6

1,00

1,25

Brussels, 18 June 2004

Meeting with NGOs

6. PSE and EU wheat support

150 120 90 60 30 0
1992 1993 1994 1995 1996 1997 1998 1999 PSE 2000 2001 Price support Export subsidies
7
Brussels, 18 June 2004 Meeting with NGOs 7

1992 = 100

Tariff protection

World price

7. EU net export share (reform impact)

100% 80% 60% 40% 20% 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Wheat Beef
8
Brussels, 18 June 2004 Meeting with NGOs 8

Pork

Poultry

8. EU net export share (pre-reform)

100% 80% 60% 40% 20% 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Sugar

Butter
9

SMP

Cheese

Brussels, 18 June 2004

Meeting with NGOs

9. What drives sugar prices

16000 12000 8000 4000 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Brazil sugar exports (000 mt)
10
Brussels, 18 June 2004 Meeting with NGOs 10

000 mt

$ / mt

320 240 160 80 0

Sugar price (FOB Caribbean)

10. What drives cotton prices

2500 2000 1500 1000 500 0 -500 -1000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
11

China net imports (000 mt)

11
Brussels, 18 June 2004 Meeting with NGOs

Cotton price (A index $ / mt)