Committee Reports > List of Committees > Joint > 1992 > Committee on the Secondary Legislation of the European Communities (6th Committee) > Report No. 13 - Proposal of the Commission of the European Communites for Agriculture in 1992

SIXTH JOINT COMMITTEE on the SECONDARY LEGISLATION of the EUROPEAN COMMUNITIES

REPORT NO 13

PROPOSALS OF THE COMMISSION OF THE EUROPEAN COMMUNITIES FOR AGRICULTURE IN 1992

(29 July 1992)

A. SUMMARY

1The Council agreement on 21 May 1992 on the reform of the Common Agricultural Policy (CAP) has far-reaching implications for Ireland given our dependence on the agricultural sector. (Paragraphs 19 to 21).

2The reform takes place in the context of a period in which farm incomes in Ireland, and throughout the Community, are falling. These declines are the result of cut-backs in CAP support for agriculture, together with a deterioration in world market conditions.

3Although in recent months, certain intervention stocks have declined, the medium term prospects are for further increases in output of the main agricultural commodities in Europe. Thus, unless measures are taken, there will be a further build up of stocks in the near future. (Paragraphs 26 to 34).

4Although agricultural incomes in Ireland have improved over the last five years as a whole, the last two years have seen sharp falls in prices and incomes. In the current year, prices should be stable and the decline in farm incomes of the last two years should be halted. (Paragraphs 35 to 39).

5As 1992/93 is a transitional year before the commencement of the reform of the CAP, the Commission’s price proposals contained little change in terms of prices, levies, premia or stabilisers. An exception was cereals where the Commission had proposed a reduction in institutional prices of 3%. In the event, the abolition of the co-responsibility levy changed that into an increase of 2%. (Paragraphs 40 to 44).

6The principal reasons for launching the reform of the CAP was the widespread belief that the level of production in the Community was unsustainable given the financial resources available and the capacity of international markets. (Paragraph 48).

7In addition, the CAP had contributed relatively little to farm prosperity and had encouraged intensive farming practices which were environmentally damaging.

8Following the failure of earlier reforms, particularly in 1984 and 1988, the Commission tabled its proposals for radical reform in July 1991. The package agreed by the Council on 21 May 1992 followed the principles of these proposals, but with a number of important differences. (Paragraph 54).

9Cereals: The cut in prices will be 29% as compared with 35% proposed in 1991. Compensation will be given in the form of premia and the restrictions on the larger farmers will be slighter than originally proposed. A form of quota will be established which will limit the total volume of production which will be compensated. (Paragraph 54 (a)).

10Milk: The establishment of quotas in 1984 have proved effective and therefore little change is needed in this sector. It was agreed to continue the quota system and to implement some small cuts in prices and possibly in quotas. (Paragraph 54 (b)).

11Beef: Prices are to be reduced by 15% and the intervention purchases are to be scaled back. Substantial compensation for the price cuts is to be given in the form of suckler cow and male beef premia which are greatly increased on present levels and on the levels proposed in July 1991. In addition, new premia will be paid for male animals slaughtered in the spring. There will be limits on eligibility by reference to size and intensiveness of production, but these are relaxed by comparison with the original proposals. As in the case of cereals and milk, a form of quota system will be established. (Paragraph 54 (c)).

12Sheep: The ewe premium arrangements now in place will continue whereas certain restriction had been proposed in July. Flocks in excess of the size limits will continue to get the ewe premium at 50% of the standard rate. However, these reliefs will not offset acute difficulties now being experienced in this sector. (Paragraph 54 (d)).

13Accompanying Measures: The Community will grant aid up to 75% a range of measures designed to encourage environmentally friendly farming, forestry and early retirement. (Paragraphs 54 (e)).

14Estimates of the impact of the agreement suggest that prices will fall significantly but that these will be compensated for by increases in direct payments in the form of premia leaving farm incomes unchanged in money terms. Allowing for inflation, however, there will be a decline in farm incomes in real terms. Smaller farmers will benefit relatively more than large farmers and cattle farmers more than tillage farmers. (Paragraphs 55 to 60).

15A number of issues need to be considered in the context of the reform agreement. These include the desirability of obtaining a differential yield for spring and winter cereals; the need for individual base areas (quotas) as opposed to national base areas for cereal growers; the optimum combination of national and/or individual quotas for the beef premium; the rules for transferability of the new quotas/base areas. (Paragraph 63).

16In the longer run a number of issues arises. The most important is that the reformed CAP is likely to come under pressure after, and perhaps even before, the reforms have been implemented due to the interaction of its cost with world market conditions. The fact that the reforms have increased the proportion of CAP support going to farmers in direct form as opposed to indirectly through the price mechanism is another factor. This is likely to increase the political vulnerability of the CAP thus possibly reinforcing pressures towards liberalisation. In the long run therefore, Irish agriculture will have to become increasingly competitive on world markets.(Paragraph 64 to 66)

17As they stand the reforms have probably had limited effect in redistributing aid to smaller farmers. Thus, the problem of rural poverty is likely to remain a significant one. An integrated rural development programme, and exploitation of the “accompanying measures” included in the reform will be needed to attack this problem. (Paragraphs 67 to 69).

18Other issues which will need the attention of Irish policy makers in the years ahead and which arise from or are affected by the reform programme include:

National aids: The growing incidence of national aids to agriculture in some member states which is placing Irish farmers at a disadvantage (Paragraph 70);

General Agreement on Tariffs and Trade (GATT) Negotiations:

The US and the Cairns group ¹ countries should reciprocate the cut backs in market supports which have been implemented in the reform agreement (Paragraph 71);

Intervention: The reformed CAP makes it more necessary (and provides some assistance) for Irish producers and processors to reduce their dependence on intervention (Paragraph 72).

B. INTRODUCTION

19At their meeting of 21 May 1992, the Council of the European Community (EC) agreed on a package of measures relating to the price regime and supporting measures for agricultural commodities for the 1992/93 year. At the same meeting, the member states also reached agreement on the principal lines which the reform of the Common Agricultural Policy (CAP) should follow. The two sets of decisions were interrelated in that the current year is a transitional year to the commencement of the reform process in 1993/94-1995/96.

20This Council meeting therefore brought to an end a long and intensive period of debate and discussion on the reform of the CAP which began in February 1991 when the Council of Ministers considered a Commission “reflections” paper on the subject.² The debate intensified after July of the same year when the Commission actually submitted its precise proposals to the Council and the Parliament.³ Of course, it can be argued that the debate over the reform of the CAP began even further back. In 1977 a “prudent” price policy was introduced which marked a break with previously established CAP principles. By the same token, it has been argued, that the reforms agreed in May 1992 are no more than the latest instalment in an ongoing series of reforms which will continue after the current proposals have been implemented in 1996. According to this perspective, the current proposals do not hold a definitive answer to the problems confronting the CAP, notably tendency for Community agriculture to supply more than can be disposed of at acceptable costs on home and export markets.⁴

21That having been said, there can be no doubt that the latest proposals including the transitional measures for 1992/93, do mark a highly significant step in the evolution of the CAP and one with very significant implications for Ireland. It must be recalled that despite the decline in its relative importance, Irish agriculture accounts for a larger proportion of GNP than any other EC member, contributes over 40% of Ireland’s export receipts and employs about 300,000 persons directly and indirectly both upstream in supplying materials and services and downstream in processing output.⁵ In addition, as the recent report by the National Economic and Social Council puts it “…through its contribution to the economic and social fabric of rural Ireland, (agriculture) is a sector of critical importance for objectives of regional and environmental policy.”⁶

22It was against this background that the Joint Committee decided to examine the Commission’s proposals for prices and associated measures for 1992/93.⁷ It was decided that these measures should be set in the context of the Council’s decisions with respect to the reform of the CAP. Since it is hoped that the Joint Committee will be able to return to the subject of CAP reform in the near future, it was decided that this present report should concentrate on summarising the measures about to be launched by the EC and in highlighting the issues for Ireland which seem likely to arise. Evaluation of the measures and their impact on Ireland, and on the appropriate responses by Irish interests and the Government will hopefully dealt with in the later report.

23The Sixth Joint Committee has already examined a number of proposals affecting agriculture. These include CAP regulations with respect to milk quotas (Report No 2); Council Directives and regulation on intra-Community trade in horses and safety of animals in transport (Report No 5); and proposals for the reform of the Common Fisheries Policy (Report No 11). Of particular note is Report No 10 “Reform of the Common Agricultural Policy” which was completed a year ago and which outlined some of the criteria against which the proposed reforms should be assessed.

24The present report was prepared for the Joint Committee by the Sub-Committee on Agricultural and Fishery Matters under the Chairmanship of Deputy John Ellis. The Joint Committee is indebted to Deputy Ellis and his colleagues on the Sub-Committee for the work which they performed so diligently on behalf of the Joint Committee. In carrying out its work, the Sub-Committee received the assistance of a number of individuals in farming interests and the Department of Agriculture and Food including, in particular, Mr. Con Lucey, Mr. Maurice Keady and Mr. Kevin Kinsella of the IFA and Mr. Tom Arnold of the Department of Agriculture and Food. The Joint Committee would also like to acknowledge the cooperation of Mr. John Muldowney, Mr. Dan Byrne and Mr. Martin Heraghty of the Department of Agriculture and Food. The Joint Committee would also like to thank the consultant, Mr. Jim Dorgan, for his assistance in preparing the report.

C. THE INTERNATIONAL CONTEXT

General Economic Conditions

25Last year marked a significant slowdown in the rate of growth in the EC economy after several years of relatively rapid expansion. Modest recovery has been forecast for this year leading to a further acceleration in 1993. However, international economic forecasts of the last year or two have tended to err on the optimistic side and that may turn out to be true of the current predictions. The relevance of the overall macro-economic environment is that the CAP has to be accommodated within a budget linked to the size of the Gross National Product (GNP) of the member states. Slow economic growth is likely, therefore, to exacerbate the pressure on the resources available for implementing reforms and supporting farm incomes. Economic conditions in the wider international context also affect demand for agricultural products, including those exported from the EC. In the recent past, the aftermath of the Gulf War has affected demand from the Middle East while Third World markets are depressed by on-going economic difficulties. The disintegration of the former Eastern Bloc had two-fold effects: on the one hand output of some commodities was reduced but in the case of others domestic consumption and import demand were also affected.

International Agricultural Conditions

Recent Developments

26Following world record cereals production in 1990/91, production fell back in 1991/92 while consumption recovered and exceeded production. The consequence of this was a recovery of world trade, with Russia an important factor. In the EC, however, it was the other way around with output rising by an estimated 6% to 181 million tonnes accompanied by a slight fall in consumption. The consequence was the addition of another 10 million tonnes or so to EC intervention stocks.

27There has been a sharp turnaround in the last eighteen months or so in the world market for dairy products. In the second half of 1991 declines in output in the EC and Eastern Europe, disposals in the form of food aid and to the food industry and for animal feed led to a rapid run down in stocks world-wide. In the EC, the application of the quotas secured a 2% fall in output and measures to dispose of stocks were successful. As of the end of the 1991/92 year, EC stocks of butter and Skimmed Milk Powder (SMP) were greatly reduced on their levels twelve months earlier. It remains the case, however, that despite the quotas, annual production in the EC exceeds domestic production by 15 million tonnes per annum.

28In the case of beef, world markets have been affected by reduced demands from the Middle East and concerns about Bovine Spongiform Encephalopathy (BSE). As a result consumption has been falling. In the EC, however; these factors have been accompanied by an increase in production. As a result of this, intervention purchases have been heavy. Despite substantial exports from the EC in 1991 stocks have increased to the region of one million tonnes. The Commission estimates that in 1991/92, Community production of beef was almost one million tonnes in excess of consumption.

29In terms of prices and incomes last year was a poor one for Community agriculture with particularly sharp falls in the real product prices of milk and livestock. There were also, of course, significant falls in the price of most farm inputs. But, in the aggregate the Commission estimates that farm incomes in the Community fell by 5% to 10% in real terms, depending on whether incomes are measured in relation to “work units” or family farms.

Medium Term Prospects

30Turning to the medium term (i.e. 1992-98), the Commission has concluded that, on the basis of policies now in place, the depressed market situation for most agricultural commodities is likely to continue - despite the various measures taken by the Community in recent years. In the case of cereals, the Commission estimates that despite the impact of stabilisers and set-aside schemes output will continue to rise over the next five years, albeit slowly. By 1997, the Commission expects output to be 10 million tonnes higher than at present. On the other hand, consumption will continue to decline, mainly as a result of an anticipated drop in animal consumption, thus threatening to yield an excess of production over consumption of 50 million tonnes per annum by 1997.

31The situation with respect to dairy products is somewhat better in that the quotas have been effective in controlling output to the level of the aggregate quota which is 97.6 million tonnes. However, the fat content of this output is increasing due to improved management and better feeds, while at the same time the consumption of some types of dairy products are declining. The net result is an annual excess of milk production over consumption of 10 million tonnes per annum. Moreover, special measures are responsible for ensuring that actual domestic use is about 8 million tonnes per annum in excess of normal consumption.

32Beef production is projected by the Commission to decline slightly from about 8.6 million tonnes in 1991/92 to about 8.3 million tonnes in 1998. On the assumption that beef can shake off some of its current adverse image in the market, it could be envisaged that consumption would rise from 7.5 million tonnes per annum to 7.7 million tonnes. Failing that, demand could resume its recent downward trend to 7 million tonnes in 1998. Either way, a very substantial excess of production over supply will continue for the next five years.

33The Commission’s forecast for the medium term has to be seen against projections for the world agricultural economy. According to the OECD, net export availabilities of cereals in the OECD member states are likely to increase to about 163 million tonnes by 1996, or 25% of annual production. The situation is somewhat better for dairy products in that output is limited and consumption is rising, but even in that case the OECD expects that by 1996 export availabilities should amount to 1.1 million tonnes or 9% of annual production. In the case of beef the OECD expects export availabilities to be around 1.3 million tonnes in 1996 equal to about 5% of annual production.

34In these circumstances, the Commission concluded that “…the Community is facing a progressive deterioration of market balances. This year the conjunctural situation is better than last year …But these short term developments do not in any way remove this need to tackle the underlying tendency to greater market imbalance in the medium and long term.” ⁸ In summing up its review of the agricultural situation from a somewhat wider perspective, the OECD observed: “The 1990 situation and the medium-term outlook indicate that reform cannot be repeatedly postponed without severe economic consequences, because structural surpluses always reemerge, following periods of temporary respite… Thus both the current situation and the medium-term outlook indicate that reform is imperative and urgent” ⁹

D. PROSPECTS FOR IRISH AGRICULTURE

Review of 1991

35In the last year, there was a decline in the volume of output in the dairy sector of about 1.5%. But this was offset by increases in beef, pigmeat and sheepmeat. The output of the cereals sector in volume terms was largely unchanged. Allowing for a rather modest rise in the volume of inputs, this yielded a net increase in output of over 3%. On the other hand, for reasons which are clear from the foregoing review of EC and world agricultural conditions, there were price decreases across almost the whole range of agricultural products in Ireland. In the aggregate the price of agricultural output fell by about 8.5%. Furthermore, there was a fall in the value of subsidies paid to farmers, mainly due to reduced payments under the suckler cow and ewe premium schemes. Thus, farm income fell by a total of 10%.

36This outcome for 1991 represents a continuation, though at a slower rate, of the decline in the circumstances of Irish agriculture that took place in 1990. In 1990, the volume of agricultural output rose 13%, but prices fell by over 20% to leave a net decline in the value of agricultural output of 8%. The impact of this on farm incomes was partially offset by a very large rise in subsidies which left farm incomes down by just 2%. Over the five years since 1986, the volume of agricultural output has increased by an impressive 24% but the downward trend in prices has more than offset this to leave the value of agricultural output just 2% lower than in 1986. Direct subsidies have become a much important part of farm incomes as EC aid has shifted from indirect to direct support for farm incomes. Largely for this reason farm incomes in Ireland have risen 33% in the past five years, even including falls in 1990 and 1991. Since consumer prices have advanced by 17% in these five years, farmers have managed to record appreciable gains in their living standards. As later sections of this report will indicate, it is doubtful if these gains in aggregate farm income can be retained under the reforms recently agreed to.

Outlook for 1992

37According to the Department of Agriculture and Food’s latest review, the immediate future, the Community beef market is likely to record an improvement on the situation in 1991 since the steady increase in beef supplies in the Community of the last few years is likely to be replaced by a cyclical decline.¹⁰ At the same time, consumption is likely to recover modestly after the declines of previous years. In the international market there are prospects for improvement due to the recovery in the Middle East market and the general growth in demand assuming the world economy picks up. Some demand is also expected from the former Soviet Union where output has is likely to continue falling. All of these factors suggest that prices and the level of output of beef in Ireland should remain about the same as last year. Intervention activity is likely to remain strong, though perhaps lower than in 1991.

38The reduction in world and Community stocks of dairy products last year has reached a point where prices are now good by historical standards. As a consequence it seems likely that the general level of prices will be in excess of that in 1991. Of course, the volume of output will be constrained by the quotas. A somewhat similar situation prevails in the case of cereals where there has also been a run-down in world and EC stocks and an excess of consumption over production. In the case of sheep, an increase in output can be expected.

39In summary therefore, it seems likely that prices will be fairly stable following the sharp falls of recent years. As output in the aggregate will also be broadly unchanged it would seem that Irish farm incomes should show little difference from 1991.

E. PRICE PROPOSALS FOR 1992/93

40In framing its proposals for the 1992/93 marketing year, the Commission was anxious to expedite acceptance amongst the member states of its proposals for reform of the CAP which it hoped to commence in 1993/94. Several of the decisions relating to the 1992/93 year were already determined by decisions taken in the preceding year. The Commission therefore proposed that, with limited exceptions, there should be no change in prices, levies, premia and stabilisers.

Cereals

41The Commission proposed that the existing co-responsibility levy should be retained at 5%. Since production in 1991/92 had exceeded the Maximum Guaranteed Quantities (MGQs), intervention prices were automatically cut by 3%. In the event, it was agreed that the co-responsibility levy would be abolished so that there was a net gain of 2%. In fact, conditions in the market are such that prices are in excess of intervention levels and so the change in institutional prices is not likely to have any real effect.

Milk

42The most important proposal was that the quotas, which otherwise were scheduled to expire at the end of the 1991/92 year, should be continued for another year. Otherwise, the Commission proposed that target and intervention prices and the co-responsibility levy should be maintained at 1991/92 levels. These proposals were accepted by the Council.

Beef

43The Commission proposed no changes in the guide and intervention prices or the intervention rules. With respect to premia, the Commission proposed that the special beef premium should remain unchanged while the suckler cow premium should revert to its 1990/91 level i.e. £35/cow, with the possibility, as before, of an additional £22.5/cow payable in certain areas of the Community including Ireland.

Sheep

44The Commission proposed no change in institutional prices or premia for 1992/93. However, reforms of the sheep regime agreed in 1989 come into effect this year and involve a reduction in the ewe premium for Irish farmers. This comes at a time of falling prices for sheep and wool.

F. REFORM OF THE CAP

45As noted in the introduction, proposals and measures for the reform of the CAP date back as far as 1977 with particularly important measures being taken in 1984 and 1988. All of these measures were aimed at addressing the problems which had arisen in the operation of the CAP in the last twenty years, particularly the problems of oversupply. Because they enjoyed only qualified success due in part to the ability of farmers to increase productivity, and partly because of international market conditions, the programme of more far-reaching measures was agreed in May 1992.

Original Objectives of the CAP

46In setting the May 1992 agreement in context it is necessary to recall the original objectives of the CAP. As stated in Article 39 of the Treaty of Rome, the CAP was intended to:

increase agricultural productivity;

ensure a fair standard of living for farmers;

stabilise agricultural markets;

guarantee regular supplies of food;

ensure reasonable prices of food for consumers.

47Three principles were adopted upon which the CAP was to be based. These were:

Single market: Agricultural commodities should move freely between the member states. This requires common prices, stable exchange rates in the agricultural sector and approximation of health care, administrative and veterinary rules and regulations.

Community Preference: Priority must be given to EC produce over that of other countries. This requires protection against imports mainly through the use of levies.

Financial Solidarity: The cost of the policy should be borne by the Community rather than by the individual member states.

Failures of the CAP

48Agricultural output responded well to the conditions created by the CAP after it was set up in the late 1950s and output rose rapidly. Self sufficiency was reached in many important commodities by the 1970s and by the 1980s the only significant deficit commodities were sheepmeat and fresh fruit. Thus, self-sufficiency, one of the objectives of the CAP was largely achieved. The CAP was not so successful in attaining its other objectives:

Surplus production: By the early 1980s significant surpluses had built up in dairy products, cereals and beef. These surpluses had to be disposed of on the world market as a result of which prices were driven down leading to friction at a diplomatic level with other exporters, notably the US but also other major producers of temperate food products like Australia and New Zealand.

Excessive costs: The cost of intervention, storage and disposal at subsidised or even at zero prices drove up the cost of the CAP. These costs are, of course, additional to the cost to consumers of maintaining Community prices above those prevailing on world markets.

Small benefits to farmers: As such a high proportion of total CAP spending was devoted to the acquisition and disposal of surplus stocks, as opposed to maintaining prices, Community farmers gained comparatively little. In real terms EC farm incomes are lower than at any time since the mid-1970s.

Agricultural poverty: Benefits of the CAP are not evenly distributed amongst farmers. Large commercial farmers have been in a better position to respond to incentives and so have benefitted disproportionately. The incidence of low incomes amongst farmers has continued.

Environmental damage: The environmental damage resulting from the intensification of agriculture stimulated by the CAP incentives, was identified in the Commission’s “reflections paper” as an additional drawback of the policy.

49The reforms undertaken in 1984 and 1988 marked substantial departures from the basic principles upon which the CAP had, until then, been based. The 1984 package introduced the milk quotas - absolute limits on production - and the principle of co-responsibility whereby producers bear the cost of disposal of stocks in excess of a certain quantity. The 1988 package saw the introduction of “stabilisers” whereby prices fall in line with the excess of production over a specified level. Incentives to farmers to “set aside” land from production were also introduced at this time.

50The initial response to these measures was encouraging, but a deterioration in markets in 1990 as a result of the Gulf War, a decline in consumption of certain products and the reduction in Soviet Union purchases saw intervention stocks build up again. In recent months they have once more begun to decline as a result of both domestic Community and international developments. But in the light of experience of the last ten years, it would be short sighted to expect that the problems of excess production leading to a reconstitution of intervention stocks would not reemerge. As the medium term forecasts of the Commission and the OECD suggest (see paragraphs 31 to 34), the trend of domestic production of most commodities is substantially in excess of domestic consumption.

Reform Proposals of July 1991.

51The principles upon which the reformed CAP is to be based were outlined by the Commission as follows:

The family farm will be protected;

The farmer will be encouraged to recognise his dual role as a food producer and as a protector of the rural environment;

Farmers will be encouraged to shift to non-food agricultural products (e.g. forestry) and non-agricultural activities (e.g. agritourism);

Production will be controlled to the degree necessary to bring markets into balance by price and quantitative means, including encouragement for “extensive” farming practices;

The CAP will continue to be based on the original principles of financial solidarity, community preference and a single market;

There will be a shift from support by means of prices to direct supports related to the size of farm or the number of livestock. But these aids will be “modulated” depending on the income of the recipient and the economic development of the region.

52The actual measures proposed by the Commission constituted a radical package in a number of respects. They included quantitative controls on a wide range of sectors of EC agriculture including cereals, beef and sheep; they sought to bring EC prices closer to world levels; compensation for price cuts was to take the form of direct payments thus radically shifting the balance of CAP farm support away from indirect assistance through the market; finally, it was proposed that the new measures would be biased towards medium to small farmers through headage and hectarage limits.

53The principal measures of interest to Ireland in the package of reforms adopted by the Commission in July 1991 were as follows:

Cereals: Support prices were to be cut by 35% to levels which approximated to world prices. Compensation for lost income was to be introduced at the rate of about £50/tonne on a graduated basis with small producers (less than 92 tonnes) getting compensation on all of their output; medium producers (92 tonnes to 230 tonnes) receiving compensation provided they set aside 15% of their acreage; and larger producers receiving compensation on output and set aside only up to 230 tonnes. After implementation of the new regime, the stabiliser arrangements including the co-responsibility levy and the MGQs would be withdrawn.

Milk: Quotas to be cut by 3% with compensation payable to affected farmers over a ten year period at a rate of about £2/gallon in total. Intervention prices to be cut by an average of 10% but the co-responsibility levy to be abolished. For farmers with less than 0.8 livestock units (LU) per forage acre in non less favoured areas (NLFAs) or 0.6 LU/acre in less favoured areas (LFAs) a premium of £66/cow payable on every cow up to 40 cows. Member states to were to be obliged to set up cessation schemes with EC funding.

Beef: Intervention prices were to be cut 15%. To compensate extensive farmers (i.e. farmers with less than 0.8 LU/acre in NLFAs and 0.6 LU/acre in LFAs) the male bovine premium was to be increased from £35 to £158. The suckler cow premium was also to be increased from £53 to £88. Both premia were payable up to a limit of 90 animals per herd. It should be noted that the Commission proposed that if stocking densities were exceeded no premia would be payable.

Sheep: The ewe premium to be payable on the number of ewes in flocks in 1990 subject to a limit of 750 ewes in LFAs (which account for about 72% of the agricultural land in Ireland) and 350 ewes in NLFAs.

Accompanying measures: These comprise proposals to encourage farmers to introduce environmentally friendly farming practices; to undertake afforestation and to aid early retirement.

Reform Agreement of 21 May 1992

54The package which emerged on 21 May 1992 retained the principles of the Commission’s July proposals but the details differed in a number of important respects.

aCereals: In place of the proposed 35% cut in prices, it is now agreed that there will be a reduction of 29% in three instalments over the period of implementation. Compensation will be available for all production by cereals producers, including large operators (output greater than about 230 tonnes). The medium to large operators (output greater than 92 tonnes) will, however, have to set aside 15% of their acreage in order to qualify for compensation. Small producers (i.e. less than 92 tonnes output) will not be obliged to set aside. The compensation will be paid on the basis of an estimated output per acre which will be determined for each region. This could have significant implications for large producers generating yields in excess of the regional average. To prevent farmers engaged in other enterprises from entering cereals there will be national or individual quotas for production analogous to those in dairying.

An important change from the original proposals is that the threshold price, below which imports will not be permitted, will be greatly increased thus aiding the competitiveness of Community cereals vis a vis imports.

bMilk: The proposals for the dairy sector involve comparatively little change given that the major reform of this sector, i.e. the introduction of quotas, took place in 1984 and has proved effective in reducing the overhang of intervention stocks. The quota regime, which was due to expire at the end of 1992/93 will be prolonged for another 7 years. National quotas will be cut by 1 % in two annual instalments (as compared with 3% in the original proposals) next year and the year after but only if the Council agrees that market conditions require the reduction. In the event of quota cuts, producers will be compensated at the rate of about £2/gallon over ten years. As far as prices are concerned, intervention prices for butter will be reduced in each of 1993/94 and 1994/95 by a total of 2.5% in terms of milk prices (as compared with 10% in the original proposals). The co-responsibility levy will be withdrawn from the beginning of 1993/94. If current market conditions continue, these changes may not have much effect on market prices.

cBeef: As in the case of cereals, beef production has exceeded consumption by a significant amount in recent years and so the actual agreements contains much of the original proposals. Thus, as proposed originally, prices will be reduced by 15% in three equal stages while compensation will take the form of increases in the male beef and suckler cow premia. However, the increases in the premia will be much larger than originally proposed. In addition to the male beef premium (£158 per animal) and the sucker cow premium (£123 per cow) premia will be offered for extensification and for spring slaughtering. The extensification premium is worth £26 for male beef and suckler cows while the spring slaughtering premium will be worth £53 for male animals. Thus the total premia could be worth £237 for male animals and £150 for cows. These compare with the original proposals of £158 and £88 for male beef and cows respectively.

These premia are paid on up to 90 animals in each herd, a limit unchanged from the original proposals. There is also a stocking density limit of 1.4LU/acre which will reduce eventually to 0.8LU/acre. But an important qualification by comparison with the original proposals is that stocking densities in excess of these limits will not disqualify the herd from getting premia for the animals up to that stocking density. In the case of the extensification premia, the stocking density is 0.6 LU/acre and stocking in excess of that will disqualify for the extensification premia. The payment of the premia will be subject to a maximum equal to the number of premia paid in individual herds in 1990, 1991 or 1992 thus introducing into beef production the concept of a quota.

Intervention will be retained but purchases will be reduced from about 750,000 tonnes in 1993 to 350,000 in 1997. The safety net will also be retained but it will be reduced from 72% to 60% of the intervention price. Under pressure from the Irish Government, the Commission has, however, undertaken to implement intervention purchases in such a way as to favour regions heavily dependent on beef production.

dSheep: The reform agreement provides for little change on the present situation which, however, constitutes a liberalisation of the July reform proposals. The maximum flock sizes eligible for premia will be unchanged from present levels at 1,000 ewes in LFAs and 500 in NLFAs as compared with 700 and 350 respectively under the original proposals. Moreover, for animals in excess of these limits 50% of the premium will be payable as at present compared to zero under the original proposals. The premium will continue to be £23.50 per ewe in NLFAs with an additional £4.80 for ewes in LFAs. The number of ewes which will be eligible will be limited to the numbers in flocks in 1989, 1990 or 1991 and not, as originally proposed, 1990. Since the Irish flock has been increasing, the ability to choose 1991 as a reference year is a useful concession for this country. As noted in paragraph 44 reforms of the sheepmeat regime were agreed in 1989 and these have entailed a fall in the ewe premium this year.

eAccompanying measures: The shape of this programme is essentially unchanged form that proposed in July 1991 but more details are now available. The agri-environmental programme will provide assistance towards the reduction of the use of inputs, the extensification of production, the upkeep of abandoned land and set aside of land for environmental purposes. The aid available will range from £87/acre to £522/acre depending on what activities are undertaken. Forestry proposals increase the maximum grant aids and premia payable to farmers. In Ireland these have already been implemented. Member states must introduce early retirement schemes offering up to a maximum of £87,000 for a farmer on 40 hectares. This can be paid in the form of a lump sum or in annual instalments. All of the accompanying measures qualify for EC assistance at the rate of 75% of total outlays.

G. IMPACT OF THE REFORM AGREEMENT

“Pre Agreement” Estimates

55Detailed estimates of the impact on agriculture of the Commission’s original proposals have been made, and the results of some of these were discussed in the Joint Committee’s Report No 5 which was published in July 1991. Since then, academic researchers have continued to refine their calculations, updating them in the light of reported revisions in the proposals during the course of Council discussions. An estimate prepared by Dr. Boyle of Maynooth University based on a reasonably up to date view of the proposals was published in April of this year.¹¹ His estimate indicates that farm incomes might fall by 2% as a result of the reform package. In assessing the impact on Irish farming of a fall in incomes of 2%, allowance would have to be made for the rise in consumer prices over the period required to implement the reforms.

Estimates by the IFA

56Full assessment of the impact on Irish agriculture of the reform agreement must await the finalisation of the details of the agreement. However, at this relatively early stage two preliminary assessments are worth noting. One summary assessment has been made by the Irish Farmers Association. According to this, the value of gross agricultural output will fall by about 20% over the period 1991 to 1995 due mainly to the impact of the reduction in cereal and beef prices in the agreement. However, the large increase in subsidies (net of levies) brought about by the new premia and compensatory payments, will offset most of this leaving farm incomes more or less unchanged. This result accords fairly well with Dr. Boyle’s “pre-agreement” estimate. Allowing for inflation over the next three years at about the same rate as the last three, the IFA “no change” estimate point to a decline in real farm incomes of around 10%.

Teagasc Estimates

57A more detailed assessment of the impact of the agreement has been outlined in a recent report by Teagasc researchers¹². According to this report, there would be a fall of £248 million in gross output (net of inputs) more than offset by a rise of £340 million in compensation payments yielding a net gain of £94 million. In terms of farms, 78% could expect to gain something and 22% to lose. However, almost half (47%) of all gains and losses will fall within £500 of 1991 incomes. This result is, obviously, somewhat more optimistic than either of the other studies.

58However, the Teagasc report also considers a “pessimistic”, but still plausible, scenario resulting from adverse developments in world markets, incorporating a sharp fall in beef prices, a reduction in milk quotas and the imposition of levies for the promotion of dairy products. These assumptions result in a steeper fall in gross output and a smaller rise in compensatory payments by comparison with their “base case”. The result is a gain in farm incomes of only £6 million in money terms.

Source: Information Update Series No 47, Teagasc

Impact on Different Types of Farm

59Other features of interest in the Teagasc analysis are the differential impact of the reforms on different types of farms and farms of different sizes. Teagasc estimate that (under the “base case”) cattle farm enterprises will gain most, while specialist tillage farms, will lose due to the impact of the average yield mechanism on high yielding farms. The greatest losers, according to Teagasc will, however, be specialist pigs and poultry farms since the decline in prices of their products, due to the competitive fall in beef prices, will outweigh the gains due to the fall in feed prices. For these farms, of course, there are no compensatory payments. Milk and sheep farming per se will be largely unaffected although typical dairying/cattle and sheep/cattle enterprises will gain from the premia payable on the cattle element of their activities.

Impact on Farms of Different Sizes

60The impact of the agreement on the distribution of farm incomes as between farms of different sizes is of particular interest since one of the major criticisms of the CAP was that a high proportion of the benefit went to a minority of large farms leaving a high incidence of poverty amongst a plurality of small farms. It will be recalled in this context that many of the restrictions in the original proposals, aimed at limiting the benefits of the reformed CAP to large farmers, were relaxed in the reform agreement. The Teagasc analysis shows that up to 100 Ha, large farms do gain more than small farms in absolute terms but in relative terms the reform agreement does inject an element of progressivity.

Employment Effects

61One other aspect of the Teagasc report is worth noting. The vast bulk of the decline in the value of gross output is attributable to the fall in prices. The fall in the volume of output is estimated at less than 1 %. This volume decline yields a loss of 1,075 man years in farming. On the other hand there will be a gain in off-farm employment of 4,000 comprising a fall of about 1,000 in processing of agricultural output and supplying of agricultural inputs, and a gain of 5,000 due mainly to the impact on real consumer income from the fall in food prices.

62The estimates of little change, or possibly a small increase in farm incomes made by the sources quoted above should be compared with the estimates made on the basis of the Commission’s original proposals of 11 July 1991. In Report No 10, the Joint Committee referred to two such estimates made, respectively, by the ICOS and the ESRI¹³. The ICOS estimate suggested that farm incomes, even after receipt of compensatory payments, would fall by £400 million, while the ESRI estimated that the fall would be around £200 million. It would seem that in relation to the earlier proposals, the reform agreement, has yielded some significant improvements in terms of farm incomes.

Source: Information Update Series No 47, Teagasc

(£)

Source: Information Update Series, No. 47. Teagasc

H. ISSUES STILL OUTSTANDING

63While the Council decisions of 21 May 1992 determine the general shape of the reform of the CAP over the next three years a number of issues of importance remain to be clarified and a number of significant decisions rest with the member states in the implementation of the reforms.

aWinter/Spring Yields: It is proposed that cereals output will be measured by reference to a national average yield. Irish interests have argued that this will militate heavily against high yield winter producers and are therefore seeking the application of differentiated yields.

bRegional/Individual Base Areas. The reform agreement allows member states to operate individual or regional base areas (quotas) for cereals. The Irish authorities cannot apply individual quotas before the autumn for administrative reasons and thus have opted for a regional (national) quota. Irish growers are concerned that in the absence of individual quotas, there will be new entrants to cereals production thereby boosting production and possibly leading to penalties on all producers.

cNational/Individual Quota for Beef Premium: The reform agreement permits each member state to decide whether to operate national or individual quotas for the beef premium. The IFA suggests that there could be a combination. The national quota would establish the largest possible entitlement to beef production for the country as a whole, while the individual quotas would protect the position of smaller producers.

dTransferability of Quotas: The rules concerning transferability of entitlements to produce cereals, beef and sheep have not yet been fully established. A balance has to be struck between, on the one hand, permitting the free marketability of entitlements, which would favour established commercial farmers and might speed the restructuring of agriculture; and administrative restraints on transfers which could be used to protect agriculture in less favoured areas and to facilitate the entry of young operators.

Size of the CAP Budget

64When the original proposals were tabled, the Commission estimated that the costs of the CAP would rise during the period when the reforms were being implemented before falling under the impact of the various physical controls and price reductions. The Commission believed that the total would not, nonetheless, greatly exceed the agricultural guideline, the maximum amount which the Commission can spend on the CAP. No estimates of the cost of the reform agreement have been made, but given that various concessions have been made, it seems likely that the cost will actually have risen above the original estimate. Of course, actual outlays will depend on the volume of agricultural production in the EC and, especially, conditions in world agricultural markets. As paragraphs 30 to 34 above have indicated, estimates by the Commission itself and the OECD are not optimistic about world market conditions. Thus, there must be a significant possibility that the CAP reform agreement will come under pressure. Even if that does not happen before the end of the implementation period, it cannot be assumed that the reformed CAP is immutable. In fact it would be more prudent to assume that the CAP will be the subject of continuous “reform”.

Direct/Indirect Agricultural Support

65While the estimates quoted above suggest that the reform agreement appears unlikely as it stands to have a very significant effect on aggregate farm incomes, the change in the composition of CAP spending from indirect to direct means of support is significant. That is to say, the proportion of CAP spending on market operations to maintain high prices (intervention purchases, storage aids, threshold prices and export refunds) will decline while the proportion devoted to compensatory payments and premia channelled directly to farmers to offset the effects of lower prices will rise. The aggregate effect of this in the CAP budget has not been clarified yet. But the general effect can be gauged from the Teagasc projections for Irish agriculture which show that subsidies will rise from 15% of Irish gross agricultural product in 1991 to 41 % after the completion of the reforms.

66The significance is that direct as opposed to indirect forms of support are politically more vulnerable. In some quarters direct payments to farmers could be seen as some form or “hand out”. This perception is likely to be sharpened in the case of those farmers who are large operators and who are receiving payments as compensation for not producing (i.e. set aside).

Maldistribution of CAP Supports

67An associated aspect of the reforms as they have actually been agreed, as opposed to their original form last year, is that the redistributive effects are much less. It will be recalled that a major deficiency of the CAP, as identified in the Commission’s reflections paper, was that a high proportion of CAP funds went to prosperous farmers, while smaller operators received very little and that, as a consequence, rural poverty had continued while CAP spending rose rapidly. The original proposals included a number of conditions aimed at “modulating” CAP spending through limiting quite strictly access by large farmers to compensation and several of these have been relaxed in the actual agreement. For example:

The limit on compensation for set aside to 15% of 50 Ha (230 tonnes) has been dropped and compensation is available on all land set aside;

The proposal that all herds on farms with a stocking rate of 0.8 LU/acre be excluded from premia has been dropped: only animals in excess of the stocking limit will be excluded from compensation;

Premia will be payable on ewes in herds which exceed the flock limits (which have been increased) albeit at 50% of the normal rate. In the original proposals these were excluded from any premia.

68These changes do not mean that all of the progressivity of the reforms has been lost. As the Teagasc report indicates, smaller farmers will benefit disproportionately from the agreement. Nevertheless, the shift in the size distribution of CAP spending appears modest. Also, of course, it is probable that as Ireland has a relatively large average farm size by EC standards, the relaxation of size eligibility is an important factor in improving the benefit (or reducing the disbenefits) of the original proposals. However, taking the Community as a whole, the persistence of skewed spending pattern increases the political vulnerability of the entire policy.

Rural Poverty and Rural Development

69The importance of redistribution of resources in agriculture in Ireland is highlighted by the evidence of statistics of rural poverty. Statistics show that one in four farmers falls below the poverty line (defined as having incomes less than 50% of the national average income). That this problem cannot be handled by the CAP alone is indicated by another salient statistic: according to the Household Budget Statistics, only 54% of the total income of farm families comes from agriculture. The balance comes from off-farm activity such as part time employment. To attack this problem, and to support farm incomes generally, a far reaching programme of rural development is required in which agriculture is but one element. The LEADER programme, which comprises a number of experiments in integrated rural development will hopefully show how this can be done. In this context it is also important that the fullest use be made of the accompanying measures to help farmers generate extra income from forestry, environmentally friendly farming and to benefit from early retirement.

“Nationalisation” of the CAP

70Financial solidarity is one of the principles of the CAP (see paragraph 47). By this is meant that the Community will pay for agricultural support and that such support will be distributed on the same criteria throughout the Community. A corollary is that national aids for agriculture must be consistent with the CAP and must not allow one member state to confer competitive advantages on its farmers at the expense of those of other member states. A trend which is therefore a considerable menace to Irish farmers is the growing “nationalisation” of the CAP, meaning an increasing tendency of some member states to introduce their own state aids outside the CAP framework. The following figures illustrate that the “industrial” member states have been increasing their domestic spending on farming while the “agricultural” member states in general have been cutting back with Ireland imposing particularly sharp cuts.

Source: Commission of the European Communities

GATT Negotiations and Agricultural Trade Liberalisation

71The agreement on CAP reform means that the discussions on agricultural trade liberalisation within the GATT can proceed. In these negotiations it is obviously important that the various measures undertaken by the Community to restrict production and to de-couple agricultural supports from production, should be recognised by the US and the Cairns group countries and should be reciprocated. The steps taken by the Community should not become the basis for further demands from these countries. Moreover, there is a danger that these countries will not reciprocate the EC restraints and in fact will expand output to take up the markets which may be abandoned by the EC. This could become a self-reinforcing process: Non EC states expand production and reduce world prices leading to increased CAP costs, prompting further production cut backs in the Community, thus providing more scope for further gains by the non- EC states, and so on. Isolated from world markets, EC producers could become progressively less competitive.

Reduced Reliance on Intervention

72The possibility that world agricultural markets will deteriorate, even given some reining back in production in the EC as a result of the reform agreement, has been alluded to above (see paragraph 63). In such circumstances, the Community will be obliged inter alia to reduce its intervention activities. Since Ireland has been particularly dependent on these outlets, Irish agriculture is vulnerable. The desirability of Irish agriculture and food industries reducing their dependence on intervention has been emphasised frequently. The reform agreement reemphasises this once more, particularly in the case of beef where sharp cuts in intervention purchases are planned. However, the agreement also provides assistance in the form of the new winter beef premium which should help reduce this dependence. In addition, the promotional funds to be made available for beef and dairy products may provide further assistance to Irish producers and processors to diversify into consumer markets.

(29 July 1992)

¹ A group of 13 self-styled “non-subsidising” agricultural exporting countries including, Australia, New Zealand, Canada, Argentina and Brazil.”

² Commission of the European Communities, 1991. Commission Communication to the Council: The Development and Future of the Common Agricultural Policy. Com (91) 100 final

³ Commission of the European Communities, 1991. Communication of the Commission to the Council and to the European parliament: The Development and Future of the Common Agricultural Policy. Com(91) 258 final

⁴ Sheehy, S. “Irish Agriculture and CAP Reform”. The Irish Banking Review. Summer 1992.

⁵ Riordan, E. B. (1989): The Net Contribution of the Agrifood Sector to Earnings of Foreign Exchange, Situation and Outlook Bulletin No 20, Rural Economy Research Centre, Teagasc, Dublin 4. Henry, E. W. (1987): “The Impact of the Agriculture and Dependent Food Processing Sectors on the Irish Economy During 1982.” Irish Journal of Agric. Econ Rural Sociology, 12:7-17

⁶ National Economic and Social Council, 1992. “The Impact of Reform of the Common Agricultural Policy.” Report No 92.

⁷ Commission of the European Communities, 1992. Commission Proposals on the Prices for Agricultural Products and on Related Measures (1992/93). Com(92) 94 final.

⁸ Commission of the European Communities, 1992. Commission proposals on the Prices of Agricultural Products and on Related Measures (1992/93). Com(92) 94 final.

⁹ Organisation for Economic Cooperation and Development, 1991. “Agricultural Policies, Prices and Trends - Monitoring and Outlook 1991”. Paris.

¹⁰ Department of Agriculture and Food. 1991 Annual Review & Outlook for Agriculture and the Food Industry.

¹¹ Boyle, G. “National Responses to the CAP Reform Proposals” in “The Impact of Reform of the Common Agricultural Policy”, NESC, paper no 92, 1992, Dublin.

¹² Fingleton, W. A., Leavy, A., Heavey, J.F. and Roche, M. “Impact of the Common Agricultural Policy Reforms 1992”. Rural Economy Report. Information Update Series No 47, Teagasc 1992.

¹³ Sixth Joint Committee on the Secondary Legislation of the European Communities, 1991, “Reform of the Common Agricultural Policy”, Report No 10.

* This percentage increase represents Stg£2 billion.