What does the EU common agricultural policy reform mean for Africa?

10 October 2013

What are the implications of the controversial European Union (EU) common agricultural policy reform for African countries?

The European Union (EU) reached a political agreement on the shape of its controversial Common Agricultural Policy (CAP) for the period 2014-2020  in June. The formal legislative texts will be approved in the autumn, and the new policy will come into force on 1 January 2014, but with a transition year to allow member states time to adjust their administrative systems to the new legislative requirements.

The European Commission put forward its legislative proposals in October 2011.  The proposals were designed, in part, to address new challenges for European agriculture, including confronting greater price volatility, bolstering climate mitigation and adaptation, encouraging more  environmentally sustainable agriculture,  strengthening the role  of producers in the food chain and promoting more  innovation and territorial cohesion. Another important motive was to legitimize the continued transfer of €40 billion per annum in direct payments to EU farmers.

In general, with the possible exception of the sugar market, the changes agreed to the future CAP are not likely to have major implications for Africa (or, indeed, other third countries). Successive reforms have greatly reduced its trade-distorting impacts. High tariffs continue to block third-country imports, but with few exceptions (beef and sugar), EU farm prices are now close to world market levels. In any case, except for some sensitive products from South Africa, sub-Sahara African (SSA) agricultural exports enjoy duty-free and quota-free access to the EU market under the Everything but Arms (EBA) preferential agreement, interim Economic Partnership Agreements (EPAs) or (for South Africa) the Trade Development  and Cooperation  Agreement.  (Nigeria, the Republic of the Congo and Gabon receive preferences under the Generalized System of Preferences, but are not significant agricultural exporters to the EU.)

The CAP agreement

Farmers in the EU continue to receive significant transfers from taxpayers in the form of largely decoupled direct payments. On average, these payments account for 30 percent of farm income across the EU, but they are distributed very unequally (if measured  in terms of euros per hectare) both between member states and, at least within the old member  states,  between farmers.  In  the old member  states (apart from  Germany), farmers' entitlements to direct payments are  still related to the specific amount of coupled payments each received in the reference period 2000-2002. Greater equity in the distribution of direct payments between member states and between farmers was thus an important objective of this CAP reform.

The negotiations on the CAP legislative texts took place in parallel with the negotiations on the EU's next multi-annual financial framework (MFF). The MFF negotiations decided the amount of resources the EU will allocate to its agricultural policy over the period

2014-2020.  The political agreement on the next MFF reached between the Council and Parliament foresees some small reductions in CAP spending in the coming period, but much less than observers predicted at the outset of the talks. Direct comparisons with spending in the current period are difficult, because of changes in budget headings and in the number of beneficiaries, but the CAP budget, which accounted for about 44  percent of the total EU  budget in 2007  (the beginning of the current programming period) will account for about 36 percent of the budget in 2020 (the end of the next programming period). Expenditure on CAP Pillar 1 (direct payments and market support) is expected to fall by 13 percent between 2013 and 2020, and expenditure on Pillar 2 (which covers rural development and structural adjustment measures)  by 18 percent.

Direct payments will be more targeted and distributed more evenly both within and across countries. Thirty percent of each country's direct payments ceiling will be allocated as a green payment to farmers who follow a set of farm practices beneficial for the environment and to mitigate climate change. Although potentially this is a step in the direction of using public money to pay for the public goods linked to agricultural production, the eligibility conditions required to receive the green payment have been heavily criticized as requiring minimal changes in farm practices across the Union.

Other tranches of direct payments can be used to support young farmers (mandatory), farmers in marginal areas, small farms or for coupled payments (voluntary). More progressivity  can also be introduced  into  the distribution  of direct  payments through a redistributive payment on the first hectares of each farm (voluntary) as well as the capping of larger payments (likely to be mandatory, but the precise details of the latter are still to be decided).

Member states will be required to move away from the historic model  of allocating payments to individual farmers to a more uniform level of payment per hectare between farms. Although the Commission wanted to achieve full uniformity by 2019, the eventual compromise gives member states greater leeway in terms of the degree of uniformity to be achieved.

Market organization changes

The CAP political agreement maintains the current architecture  of market management tools, including safety net intervention, recourse to private storage and the use of market disturbance clauses to address periods of price crises. Pressure to raise the level of market support guarantees was resisted, although more  scope is given to member  states to provide coupled payments to support a range of farm sectors. A risk management toolkit is proposed (to be funded under Pillar 2, so it is up to member states whether or not they wish to adopt these measures). Dairy quotas will be eliminated in 2015 and sugar quotas in 2017, although a system to limit the expansion of the area under vines is kept in place. Measures are also adopted to strengthen producer organizations to redress the imbalance of bargaining power along the food chain. Rural development programmes are made more flexible with a stronger emphasis on innovation and encouraging collective action by producers.

Implications for Africa

The current CAP reform has no direct implications for trade policy; the EU continues to insist that any reductions in import barriers or the elimination of export subsidies must be negotiated in the context of the World Trade Organization (WTO) Doha Round. However, there could be some  market effects arising from the reshuffling of direct payments. Attaching additional environmental conditions to the receipt of direct payments will raise farmers'  costs slightly,  thus lowering production.  Redistributing  payments from more to less productive farms and regions could also lead to slightly lower overall production in the EU (allowing  that even decoupled direct payments do provide some stimulus to production). At the same time, member states may use the greater scope for coupled payments to recouple payments to specific sectors.  More support for innovation  and agricultural research and development (R&D) may also strengthen EU agricultural competitiveness and production in the longer run.

There could also be market effects  from the removal of quota limits  on the supply of milk and sugar within the EU. In the case of dairy products, in many member states production does not reach the quota level so quotas are not binding. The EU has prepared a ‘soft landing' by gradually increasing quotas by 1 percent per annum in recent years. The elimination of milk quotas will allow expansion to take place in a handful of more competitive  member  states,  but  high  feed  costs  and  stocking  density  restrictions on environmental grounds will limit the size of any production increase. Against the background of buoyant global dairy markets, an increase in EU production resulting from the removal of dairy quotas is not likely to have a disruptive effect on world dairy product prices or to lead to a surge in milk powder exports to SSA.

The planned removal of sugar quotas has been more controversial. Both the African, Caribbean and  Pacific  (ACP) Group of States and  EU  development nongovernmental organizations (NGOs) supported the continuation of EU sugar quotas until 2020 and have expressed dismay at the negotiated compromise, which will see them eliminated in 2017. Sub-Saharan African exporters to the EU market expect that the removal of quotas will lead to significantly lower EU market prices by encouraging additional white sugar supply, including from current out-of-quota sugar grown in the EU as well as greater competition from isoglucose. The Commission's latest assessment of the impact of the removal of sugar quotas projects a lower domestic sugar price in the EU but no increase in domestic white sugar processing. However, the lower EU price will make imports less attractive, and it projects that sugar imports will decline from current levels.

However, much  will depend  on  the future  level of world market prices. The lowest forecasts of EU imports of sugar from the EBA-EPA countries are foreseen with the highest world price assumption. But, if world sugar prices continue to be high, the prospects in other sugar markets, including regional markets, will be good. Despite very attractive EU market prices in recent years, EBA-EPA producers did not increase exports significantly, because world sugar prices were also high and competing markets were more attractive. Producers in East and Southern Africa are among the world's lowest-cost producers of sugar, and the production potential is enormous.  Africa itself remains an importer of sugar, with most imports  coming  from Brazil. Duty-free  access will continue  to make the EU market attractive. Higher-cost exporters, such as Mauritius, have moved up the value chain and now export only value-added products rather than raw sugar. The bigger problem is likely to be overcoming the constraints to increasing supply as efficient cane farming must be irrigated and large-scale.

Conclusions

The  2013  CAP  reform  contains  measures  that  both can  stimulate  and  restrain  EU agricultural  production  compared  with  a  continuation  of current policies.  Therefore, in aggregate, the impacts are likely to be rather neutral on world markets. But, the consequences for individual commodities will be more nuanced. The impact of greening direct payments will largely affect arable production, for example, and may result in slightly higher prices for cereals and oilseeds as a result. However, the removal of sugar quotas from 2017 will have the opposite effect of lowering  EU sugar prices. How African countries are affected will thus depend on the composition of their exports and imports and on the ease with which changes in world market prices are transmitted to their domestic markets.

But, the overall orders  of magnitude  must be kept in perspective. With the possible exception of sugar, the production and trade effects of this CAP reform are likely to be very minor, certainly small in comparison to recent world market price volatility and small also in comparison with the impact of other, non-agricultural, EU policies,  such as renewable energy targets, new trade preferences in the context of regional trade agreements, higher animal welfare standards,  restrictions on the use of biotechnology and environmental policies.

Author: Alan Matthews - Professor Emeritus of European Agricultural Policy at Trinity College Dublin, Ireland.

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