'Greener' farm subsidy policy could lower EU output capacity, but distort trade - study

12 October 2011

FOR IMMEDIATE RELEASE

Press Contact: Jonathan Hepburn
T: +41 22 917 87 56; jhepburn@ictsd.ch

Geneva, 11 Oct 2011

New 'greening' measures in the EU's proposed €418-billion post-2013 farm policy could lower the bloc's agricultural production potential by raising farm input costs by €5 billion, or around 2 percent, a new study reveals.

The draft paper, written by Prof. Alan Matthews for the International Centre for Trade and Sustainable Development, finds that EU production capacity could fall slightly if governments go ahead with plans that would encourage farmers to adopt greener agricultural practices, and that would also redistribute direct payments to more marginal areas. The European Commission is due to make public the proposals this Wednesday - although early drafts have circulated unofficially.

“Greater emphasis on encouraging farmers to adopt environmentally-friendly farming practices will lower the EU’s production potential, compared to a status quo scenario”, says Matthews.

The new proposals would require farmers to respect three new environmental conditions for receiving payments: maintaining permanent pastures, diversifying crop production and protecting ecological 'focus areas'. Arable producers would be particularly affected, the study finds – although higher feed prices will also reduce EU pig and poultry production, and constrain any expansion in milk production.

EU cotton output could fall, as 'coupled' cotton payments that are linked to production levels will be reduced slightly, Matthews says.

“The remaining support continues to unbalance the playing field for developing country exporters, particularly in West Africa”, Matthews says.

Plans to eliminate sugar quotas could lead to a substantial increase in EU production, the study suggests. The bloc will import less sugar from suppliers that benefit from preferential market access – particularly the least developed countries and exporters in the African, Caribbean and Pacific regions, whose exports to the EU could even be eliminated if world sugar prices remain high.

In contrast, plans to abolish milk quotas will not affect world markets significantly, Matthews finds.

EU beef and sheep production will probably be higher than would otherwise be the case, partly as these sectors are likely to continue receiving the production-linked payments that they have been given in the past, and partly because direct payments are likely to be redistributed to parts of Europe where beef and sheep farming is more important.

“A more ambitious CAP reform, in which the targeting of direct payments was pursued more insistently and coupled payments were phased out, would have a greater impact in removing the remaining distortions caused by the CAP to world markets”, Matthews says.

Over the years, the EU's trade-distorting farm subsidies have been highly controversial with the bloc's trading partners at the World Trade Organisation, and especially with developing countries. Along with domestic concerns about waste, inefficiency and the environment, these criticisms have helped prompt a series of domestic policy reforms aimed at delinking support from production.

“Rather than attempting to maintain and increase production through distortionary public supports, the more appropriate way to increase the EU’s production potential is through greater innovation leading to higher productivity”, added Matthews.

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Notes to editors:

1. The International Centre for Trade and Sustainable Development (ICTSD) is a nonpartisan think tank, based in Geneva, which - by empowering stakeholders in trade policy through information, networking, dialogue, well targeted research, and capacity building -seeks to influence the international trade system such that it advances the goal of sustainable development. http://www.ictsd.org/

2. On 12 October 2011 the European Commission is due to release legislative proposals for the EU's Common Agricultural Policy in the post-2013 period. The draft study by Prof. Alan Matthews has been prepared on the basis of early drafts of these proposals. The actual proposals to be released this Wednesday may differ. The final version of the paper will be updated to reflect these proposals.

3. Professor Alan Matthews is Emeritus Professor of European Agricultural Policy at Trinity College Dublin, Ireland. In preparing the paper he wrote for ICTSD, the author drew on research he had undertaken for the German Marshall Fund of the United States on Europe’s Common Agricultural Policy and Developing Countries. The author is grateful to the German Marshall Fund for its support, and wishes to clarify that any opinions expressed in the paper are entirely his own.