Farm Ireland
Independent.ie

Monday 5 December 2016

This CAP no longer fits the reality of farmers' lives

Alan Renwick

Published 09/09/2015 | 02:30

Alan Renwick
Alan Renwick

Within the European Union just under €60bn is spent annually supporting farmers, yet we are in the midst of an income crisis in many agricultural sectors.

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Low farm incomes and the current wave of protests across Europe highlights the failure of the CAP to achieve one of its central aims - supporting farm incomes.

Over the last 20 years the CAP has been continually reformed. These reforms have addressed many of the economic problems associated with the 'old' CAP, such as butter mountains and wine lakes, but have failed to tackle one of the biggest issues in agriculture - income instability caused by price or yield variability.

It's not just an EU issue.

Farm incomes in the US are predicted to fall by 36pc this year, admittedly from a historically high level, and incomes of farmers right across the globe have been suffering. This raises at least two big questions. Should governments intervene to address what some argue to be simply a result of a global oversupply problem and what shape should intervention take?

Across Europe the range of protests that are occurring at Government and EU institutions clearly indicate that farmers are demanding action by governments.

However, this is not the case everywhere. For example, recently in New Zealand the head of the main farmers' union is reported as saying that there is no crisis, that the banks understand the situation and will support farm businesses and that the only role for government is to reduce the regulatory burden on farms.

Along similar non-intervention lines, one view is that in the dairy sector at least, Ireland should not be demanding that the EU raise intervention prices as this will only benefit higher cost producers in other parts of Europe.

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Without the support of intervention buying, market forces will lead to the higher cost producers going to the wall and then Ireland will be in the position to reap the benefits of higher prices as supply falls. There is a simple economic logic in this argument, but it does require a leap of faith - not least that the interference in dairy markets will actually see high cost producers exit the sector.

In terms of justifying government intervention, basic economic theory indicates that price uncertainty leads to less than optimal decisions by farmers and that this can lead to real costs to business and wider society.

This suggests that there is a role for governments in addressing volatility for the benefit not just of farmers but for society as a whole.

But within Europe, the CAP seems ill equipped to meet these challenges.

One major problem is that the current system of direct payments is not responsive in any way to what is happening to farm incomes - it is simply a constant annual payment.

Other countries such as Canada - and the US to some extent - have developed schemes that provide what are known as counter-cyclical payments.

These payments rise when incomes are low and fall when incomes are high, reducing the impact of volatility of the farm business

However, it is actually hard in practice to effectively and efficiently establish truly countercyclical payments - due in part to the amount of information that is actually required on individual farm incomes.

Focussing attention on the role of policy should not deflect from the fact that across the agrifood sector more attention needs to be paid to volatility and risk management in general.

Some examples of questions that should be asked include: is the specialisation in the production of one commodity really the best strategy for farms?

Are those processing and marketing agricultural products really doing everything they can to manage price volatility? What is the role of the financial sector in supporting farms through periods of low prices? There is a fine balance to be made in terms of government intervention between addressing the real income problems that farmers are facing in Ireland and elsewhere and actions that prevent the development of proper risk management strategies by farmers, their organisations and the private sector more generally.

Alan Renwick is Professor of Agriculture and Food Economics at UCD

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