Tag Archives: CAP

European Farmers expanding output

Living in a rural area you tend to get a lot of free newspapers with a agricultural bent. Skimming the pages of NZ Farmer (March 28 2016) I came across a very informative article by Keith Woodford about European farmers expanding their value-add dairy production and its impact on New Zealand.

Up toCAP Int Price April 2015 European farmers were protected by production quotas and the Common Agricultural Policy (CAP) which provided large production subsidies which led to over-production. At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector.

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated opposite. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.

2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.

3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.

4. There is a contraction in domestic consumption to 0Qd1

Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

Production quotas in Europe were eliminated in April 2015 and from April to November European milk production increased by 4% with a 6% increase in December from the previous year. However, as with the reduction in subsidies in New Zealand in 1984, they will be a lot of pain for European farmers as their ‘safety net’ has now been taken away.

The Europeans are producing as much cheese, butter, infant formula and cream as they can, with cheese being more important than liquid milk.  The Europeans are also selling increasing quantities of UHT and infant formula to China.  With both products, they are out-marketing New Zealand.

Chinese infant formula statistics for 2015 show European countries with 78 per cent market share of imported product, compared to New Zealand at 8 per cent.

#1 – Holland – 34%

#2 – Ireland – 15%

The Europeans would like to decrease their production skim milk powder (SMP), but with butter and cream being profitable, they keep producing the SMP as a by-product.   However, the European production of whole milk powder (WMP) has been drifting down in response to low prices.

The European producers have protection from some of the Global Dairy Auction process through their reliance on value-add products.  Also, apart from Ireland, all European dairy systems are 12-month-a-year production systems.  These 12 month production systems can lead to higher production costs, but they also lead to lower processing costs through better utilisation of processing infrastructure. This then feeds back into higher farm-gate prices.

Buffer Stocks

The Europeans have been putting limited quantities of skim milk powder (SMP) into what are called intervention stocks. At the end of January 2016, there were about 50,000 tonnes of SMP in a public intervention store. The intervention quantities could reach a new limit of 218,000 tonnes over coming months. The main benefit of the SMP intervention is a smoothing of commodity prices. So if the price is too high stocks are released into the market and when they are too low authorities buy stock in order to reduce supply and therefore increase the price to a specific level.

European Farmers and the future

There is a good chance that in the longer term European milk production will further increase, as some farms become bigger and fewer in number.  Poland has become one of the largest milk producers in the EU become a major milk producer with its flat terrain, very fertile soil, low feed and labour costs. Furthermore compared to other EU members it doesn’t have the pressure on land for residential use. Since joining the EU in 2004, the informal dairy sector is also still considerable in Poland, but the 2015 quota lift has seen these farms absorbed into the formal sector which in turn are expected to expand quickly without quota impediments.

Conclusion

For this longer term, the Europeans are not going to try and compete with New Zealand with WMP.  Europeans regard WMP as an outlet for product with no other immediate use. And they know that, in low-priced volatile commodity markets for long-life products, they lack competitive advantage relative to New Zealand. 

Poland – EU subsidies delay farm reforms

The recent ‘Special Report’ in The Economist outlined the benefits of Poland’s membership of the EU to the agricultural sector. Agriculture is the biggest beneficiary and ironically farmers were some of the most committed opponents of EU entry. They suggested that only 600,000 of the country’s 2m farms would survive entry. But their mood changed when Polish agriculture received 40 billion in 2007-13 and another 42.4 billion from 2014 – 2020. From the EU funds farmers’ incomes have tripled since entry, with half of the money coming from direct cash payments, regardless of need. But the agricultural subsidies are a mixed blessing as it encourages inefficiency in the sector as half the farms that receive assistance are just subsistence plots, and 92% of them are less than 20 hectares. But Polish agriculture accounts for only 3.4% of GDP but 12.4% of employment. However the rural population makes up about 39% of the total so therefore farmers are an important political constituency. The graph below shows the impact of the price support system.

CAP Int Price

CAP reforms unlikely to benefit New Zealand farmers.

A move by the European Union to slash subsidies to farmers isn’t as big a deal as it sounds. The EU has announced cut to the subsidies it pays industrial scale farmers of up to 30% – this is part of the Common Agricultural Policy (CAP) which costs the EU tax payers 50bn a year and is 40% of the whole EU budget. This will be of little benefit to NZ farmers as they will still be denied access through tariffs and quotas on sheep, butter, cheese etc.

Objectives of CAP

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector has been known as the common agricultural policy – CAP. The CAP was established under Article Thirty Nine of the Treaty of Rome, and its objectives – the justification for the CAP – are as follows:

1. Raise and maintain farm incomes, through the establishment of high prices for food. Such prices are often in excess of the free market equilibrium. This necessarily means support buying of surpluses and raising tariffs on cheaper imported food to give domestic preference.
2. To reduce the wide flutuations that often occur in the price of agriculutural products due to uncertain supplies.
3. To increase the mobility of resources in farming and to increase the efficiency of all units. To reduce the number of farms and farmers especially in monoculturalistic agriculture.
4. To stimulate increased production to achieve European self sufficiency to satisfy the consumption of food from our own resources.
5. To protect consumers from violent price changes and to guarantee a wide choice in the shop, without shortages.

CAP Intervention Price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

CAP Int Price
Figure 1: The effect of an intervention price on the income of EU farmers.

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU.