2 April 1999

EUclimbdown over CAPreforms could be self-defeating

By Philip Clarke

FARM incomes could come under increasing pressure in the next few years after EU heads of state watered down the CAP reforms agreed by farm ministers.

In an effort to contain farm spending at current levels, Europes leaders have decided to delay the changes to the dairy sector from 2003 until 2005, and to limit the price cut for cereals to 15% and not 20% as agreed by farm ministers. This will have the effect of lowering the compensation bill, while making the deal appear less painful for farmers.

But farming leaders have attacked the changes as short-sighted and potentially damaging.

"This is considerably worse than the original agreement," NFU president, Ben Gill, told farmers weekly. "I can see it lasting perhaps three years before further reforms will be needed."

And Scottish NFU leader, Jim Walker, described the deal as a "fudge" which failed to give a clear vision of the road ahead.

The fear is that in both the dairy and the cereal sectors, the final Agenda 2000 package does not do enough to rid the EU of export subsidies. As such, the commission will be faced with the choice of either opening up intervention stores or tightening its grip on output as surpluses emerge in the next few years.

The problems in the dairy sector are exacerbated by the fact certain member states will get 1.2% more quota from next year, while support prices wont fall for another five years.

In particular, the Republic of Ireland will be getting another 150m litres, much of which will come to the UK as cheese or butter, milk prices.

The European Dairy Association in Brussels believes returns could drop by more than 10% throughout Europe in the next few years due to supply pressure, with compensation only kicking in from 2005.

Cereal margins are also expected to suffer as a result of the changes in the reforms. "In our initial analysis we put the drop in farm gate prices at 15% rather than the full 20% for intervention, to allow for market conditions," said NFU chief economist Sion Roberts. "That has not changed. But the compensation on offer has dropped which will hit margins."

At current exchange rates, the level of area aid would fall by £12/ha to £247/ha in 2002. Oilseeds are also expected to reach this level.

More worrying, is the decision to put the basic rate of set-aside at 10% for the next seven years. With set-aside payments being moved on to the same rate as cereal area aid, there will be a considerable loss of income.

The 10% rate will, of course, be subject to annual review by the council and commission in the light of market conditions. But with the EU already getting close to its GATT limits on the amount of coarse grains it can export with subsidies, analysts believe set-aside is more likely to go up than down.

"We risk losing our share of expanding world markets as a result," said Mr Gill. "The US must be rubbing its hands with glee."