4 August 1995

End to support cash not all bad, says think tank

By Peter Bullen

Political correspondent

SCRAPPING all farm subsidies could cost UK farmers £5600m a year.

That would seem to have catastrophic implications for UK agriculture, says MAFFs independent think tank on reform of the CAP. But scrapping support would spark off a series of changes that would cut the figure to £2000m-£3000m (although that is still nearly two-thirds of the total income from farming).

The conclusion is among several forecasts contained in the think tanks working papers published at the same time as its report last week.

Other consequences of scrapping subsidies would be a drop in land prices, a big decline in the labour force but better opportunities for new entrants, it says.

Land prices and rents could fall markedly. It suggests a drop of 40% in the rental value, the equivalent of £700m. And the cost of leasing milk quota would disappear, which would save the industry another £1400m a year.

Reduced farming costs

"Taken together these factors would significantly reduce farming costs for new entrants and for some current farmers, especially those wishing to expand their business," it adds.

Assuming no changes in production levels, higher world prices should offset the £5600m subsidy loss by £1100m-£1600m a year. Further savings of £900m to £1200m would come from cuts in the use and prices of inputs such as feed, fertilisers and sprays, and wages and machinery costs.

Removal of support would bring about an initial reduction in the value of output, which would set in train a dynamic adjustment process, says the group.

Farmers would reduce inputs and in some cases stop production altogether. The lower output would in turn lead to reduced world supplies and a rise in world market prices.

Another set of changes would be sparked off by cuts in input prices as farmers adjusted to lower production costs and a different set of price relationships.

Additional resource gains would come from producers moving from the sectors most affected by the loss of support (such as dairy, oilseeds and cereals) into those with improved relative profitability (livestock, horticulture and beef).

Smaller agricultural sector

"After adjustment the agricultural sector would be smaller in economic terms but those remaining would earn comparable returns, although on values of assets, particularly land, which would be lower," says the think tank.

One of the most crucial factors would be the length of time given to withdrawing subsidies. If imposed over a short time without any compensation a lot of farms would go out of business with many distress sales as collateral failed to support borrowings.

"The result would be a dramatic short-term fall in production creating severe shortages on world markets and a surge in world prices with those who had survived making considerable gains," it states. "The eventual outcome would be similar to that under a staged (or flagged) reduction but probably with a more radical adjustment of structure."

Whichever time-scale was used consumers would benefit in the long run through cheaper food. Any increase in consumption would be small. Food manufacturers and distributors would also benefit from the lower cost of raw materials and above all from the removal of bureaucracy.

In the short term manufacturers of fertilisers, sprays, plant and machinery would suffer quite severely.

Although a predicted 80,000-100,000 reduction in the farm labour force seems high, the loss would only be at a slightly faster rate than the decline over the past decade.

Bigger units

About 20% of farms could move into the 100ha-and-above class (247 acres) and there could be even more expansion of farms in the 20 to 50ha (45 to 124-acre) band. A dramatic drop in very small farms may not happen as more part-time farmers could be encouraged into the industry by lower land prices and removal of quotas. &#42