CAP reform: austerity or posterity?


Unprecedented food price volatility has reshaped the CAP debate

The stage is set for reform of the EU’s ever-contentious Common Agricultural Policy (CAP). The public has been consulted. Stakeholders have defended their stakes. MEPs have put their two cents in. And member states have laid down their red lines. In the coming weeks EU Farm Commissioner Dacian Ciolos will try to synthesise the conflicting views into concrete ideas for reforming EU farm policy.

But what type of CAP reform is the stage set for? Designing EU farm policy is always a delicate balancing act, given that countries at either extreme of the debate want almost diametrically opposed things. The pro-intervention bloc (France, Ireland and other CAP stalwarts) believes inherently in doing whatever it takes with public money to keep farmers in business. Meanwhile, the liberal-leaning bloc (principally the UK and the Scandinavians) is fundamentally opposed to ‘distorting’ the market by deploying public money to keep farmers in business.

This time the balancing act may be even tougher to manage. The economic crisis has raised the stakes in the debate over public intervention and the role of the state; when that ‘state’ is the EU and the public intervention is in the farm sector, divisions are even more crystallised. It appears harder than ever to reconcile those who envisage the state as the necessary overseer of stability with those who see it as the root of harmful dependencies and taxpayer burden. In many cases the fault lines are likely to run between agriculture and finance ministries within the same member states.

Stalking the speculators

On the one hand, the EU is rallying around efforts to bring stability to the economy, a trend which favours strong, interventionist policy.

Speculative financial activities are now in the spotlight. The EU’s internal markets chief, Michel Barnier, has launched plans to force transparency on secretive derivatives trading, in a bid to allow speculation to reveal itself – and to burst its own bubble – before the underlying assets are forced out of kilter.

Much of this speculation comes in the form of bets on interest rates, exchange rates and sovereign debt defaults. However, commodity-based derivatives – where buyers effectively bet on price movements for wheat, copper and other raw materials – is a growing source of financial activity, and is also coming under Barnier’s microscope.

Food prices are naturally subject to fluctuations: unpredictable climate factors and changeable trade conditions mean that the food supply can grow and shrink significantly over short periods of time – and prices can move accordingly.  But the real trouble is seen to occur when speculators pile into agricultural markets, buying up the commodity – or a derivative of it – and exacerbating price spikes. The topsy-turvy price curves of the last three years have confirmed some of the wildest fears about the involvement of new players on agricultural commodity markets.

Farms – too fundamental to fail?

With the issue now dominating EU and G20 agendas, the ground is fertile for tackling the volatility-speculation issue on all fronts. Right on script, agriculture ministers from France and its pro-CAP allies are talking up the risks of price volatility to farm livelihoods, and are driving the agricultural reform agenda in the direction of stability. In CAP language, this means strong income support payments to farmers and market management tools which kick in when prices plummet, i.e. two of the three tenets of current EU farm policy (the other being the recent addition of ‘rural development’). The status quo plus camp would also like to see EU-subsidised insurance schemes added to the toolkit to provide another layer of protection for farmers.

The liberal dissidents are trying to fight the tide. In their eyes, farmers should not hide behind subsidies, but should bank the high prices and ride out the low ones, plugging themselves into the markets and using hedging opportunities to their advantage. But their tough love message is being drowned out by the calls for fresh intervention, tied to compelling scenarios of what will happen if nothing is done and farmers are left at the mercy of unpredictable price cycles. Many – including EU Agriculture Commissioner Dacian Ciolos – are arguing that farms cannot be allowed to fail. The knock-on effects would be social upheaval, environmental damage, and a loss of ‘food sovereignty’, as rural regions have the agricultural heart ripped out of them. A whole tradition and way of life would be lost to posterity.

The political climate is highly receptive to this message. Banks were not allowed to fail – the ensuing upheaval would have been too great. Farm ministers are hoping that the logic will hold for European agriculture. And the EU is hardly alone in protecting its ‘strategic’ interests. Look at Brazil, French Farm Minister Bruno Le Maire fumed this week, pointing to Lula’s recent moves to restrict foreign ownership of farmland. Why can’t the EU protect its own farmers from the frightening forces of investors, speculators and market mayhem? The taboo about public intervention has been swept aside, and nothing will work more in favour of retaining a well-budgeted and strong-armed EU farm policy.

Is CAP next victim of the ‘war on waste’?

But from another angle, the climate is absolutely opposed to public intervention – at least when it is broken down into facts and figures. The idea of irresponsible traders betting on food commodities and sending bread prices skyward chimes perfectly with popular outrage at the economic crisis. But CAP largesse, to the tune of nearly €60bn per year, is also a natural target for popular outrage, at a time of burgeoning public deficits and wars on waste. This exposes the CAP to the same cost-cutting zeal which is currently taking aim at the welfare state in a host of EU countries. For the ‘small state’ lobby, scrapping EU farm subsidies is the holy grail.

And this is where the internal fault lines may fall.  For finance ministers, bringing stability to the EU economy can conceivably mean fighting for derivatives transparency – but may not extend to propping up farmers indefinitely through unconditional paychecks. The public and the political establish are currently highly averse to both economic volatility and to big public outlays. For the future of the CAP, much will depend on which of the currents subsides first.

Photo courtesy of Simon Howden at Freedigitalphotos.net