6 November 1998

How agrimoney system affects the outsiders

With the UK opting to stay

out of the euro for the time

being, a new agri-

money system is needed to

deal with farm support.

European editor Philip Clarke

studies the details

WHEN EU farm commissioner Franz Fischler instructed one of his minions to come up with a new agrimoney system to run alongside next years single European currency, he had two objectives in mind.

First, it should be cheaper than the current arrangement. Second, it should be easier to understand.

Looking through the commissions proposal, it would appear his green money guru has had only mixed success.

With regard to the cost, it would have been hard to have failed. The present system has evolved over the years so as to give maximum protection to Europes farmers from adverse currency movements.

In the 10 years to 1995 this was achieved by simply raising support prices in ecus when individual currencies strengthened, leading to a permanent cost increase of over £5bn to the EUs farm budget.

Since 1995, green rates (for converting subsides from ecus to national currencies) have been kept above actual market rates – especially for direct income aids – costing EU tax payers another £1bn a year.

Cheaper outlook

The elimination of green money from Jan 1, 1999, is bound to make things cheaper.

But on the second point – achieving a more understandable system – the commissions success is more questionable. The following quote, defining an "appreciable revaluation", is taken from the explanatory memorandum:

"The proposal suggests comparing each year the average exchange rate observed over year &#42 with the exchange rate on Jan1, 1999, and the averages for years n-1, n-2 and n-3, and calculating the appreciable part of the revaluation as a function of the difference between the average for year &#42 and the lowest of the exchange rates on Jan 1, 1999, and of the three averages n-1, n-2 and n-3. This system is much simpler and easier to understand than the present system."

Clearly the architect of agri-money reform has spent too much time in a Brussels corridor.

But cut through the bureaucratic babble (over 40 pages of it) and underneath is a system more in tune with the market and, believe it or not, easier to understand (see table below).

Gone is the complex system of franchises, used to assess whether the fifteen national currencies of the EU are sufficiently adrift of the fixed green rates as to trigger a revaluation or devaluation. Gone is the time consuming and trade distorting process of confirmation periods, whereby a currency has to be monitored for 60 days to see whether a change in the green rate is justified.

Instead, from 1 Jan, 1999, all 11 countries joining the single currency will have their support prices and direct income aids set in euros – there will be no need for any agrimoney system for these participants, as their exchange rates are permanently locked.

And for the UK, (plus Denmark, Sweden and Greece), payments will simply be converted into sterling using the actual exchange rate against the euro on the day.

In the case of intervention and export subsidies, this will be the £:euro value on the day a trader tenders to the commission. But for direct income payments, it will be the rate at the start of the marketing year, ie Jan 1 for livestock premia and 1 July for area aid. Brussels has also paved the way for UK farmers to be paid in euros, though at this stage it is unclear whether MAFF will take them up on this option.

Inevitably there will have to be some closing of green £ gaps on Jan 1, 1999, as currently area aid is set using a green rate some 8% above the market rate, while livestock premia are 11% higher than they would otherwise be.

These are the so-called "frozen" green rates. But fortunately there is to be 100% compensation for thawing them out, paid in the form of top-ups.

As such, direct income payments should be unchanged in 1999. (In total, eight member states stand to benefit from this measure.)

This compensation will be phased out over the following two years. But, UK farmers should not really notice the effect, as direct income payments will be rising under Agenda 2000 anyway.

Also, if sterling weakens against the euro as most bankers think it will, payments will increase when converted into sterling (see box).

Should the bankers get it wrong and sterling strengthens again, then the Brussels proposal provides for compensation – both for falls in support prices and direct income payments.

Fewer small top-ups

This only kicks in above certain thresholds, (0.5% for direct income payments and 2.6% for support prices), to save Brussels having to make too many small, insignificant top-ups.

Despite strong political pressure to get the package wrapped up this autumn, deliberations are still continuing in Brussels, with Dec 15 the likely decision date. Some member states are reluctant to commit themselves to an early deal while currencies are still so volatile.

Generally, however, there is broad acceptance of the commissions agri-money proposals, which are considered generous to the four countries staying outside the euro.

Without the compensation, UK farmers would be more than £200m worse off next year.

Example of area aid

Area aid set at 320 euros/ha (previously 320 ecus/ha)

At £1 = 1.48 euros

Area aid = £217/ha

At £1 = 1.38 Euros (ie weaker)

Area aid = £232/ha

&#8226 All fixed "green rates" abolished from Jan 1, 1999.

&#8226 Intervention prices and direct income payments set in euros instead of ecus from Jan 1, 1999.

&#8226 UK support prices and subsidies converted from euros into sterling using the real market exchange rate on the day. (For headage payments this means Jan 1 and for area aid, July 1.)

&#8226 Farmers to have the option to receive area aid/headage payments in euros, so long as they do not gain "systematic advantage" from doing so.

&#8226 Full compensation to be paid by Brussels for dismantling the so-called "frozen" green rate, which currently keeps direct income payments at least 11.5% higher than they would be if subsidies were converted at market rates.

&#8226 Further compensation to be available for falling farm income should sterling appreciate. This is to be paid in three tranches, the amount reducing each year.

&#8226 In the case of price support, this compensation only to be paid if sterling strengthens by more than 2.6% during each calendar year. Compensation is optional, but Brussels will fund 50% of the amount actually paid by government

.l In the case of direct income payments, compensation only to be paid if sterling strengthens by more than 0.5% during each marketing year. Brussels will pay 100% of the compensation in the first year in the form of extra aid. For the next two years, only 50% from Brussels, with government having the option to match it.

&#8226 Compensation to be phased out by the end of 2001.