Momagri’s response to Farm Europe on counter-cyclical aid and insurance
Momagri Editorial Board
Momagri’s proposal to reallocate a part of the CAP’s first pillar budget toward counter-cyclical aid is gathering increasing support among farmers, political leaders and experts.
Those opposed to the proposal are doing so by using the following five arguments, which Momagri wants to address.
I- “Counter-cyclical aid requires a variable CAP budget, which is unfeasible”
Agricultural prices and incomes are becoming increasingly variable, so why would the European agricultural budget earmarked for agriculture not become more variable?
1) The budget of the second pillar (EAFRD), just as other European funds (the European Globalisation Adjustment Fund, the European Regional Development Fund, the European Social Fund and the European Fisheries Fund) already are multi-annual budgets, as annual disbursements vary from one year to the next. It is simply a question of adjusting the budgetary process to the first pillar. As soon as an agreement on another CAP is reached, the budgetary authority––the European Council and the European Parliament––will take appropriate action. Quite a number of European elected officials are admitting that the decision on budget flexilibity is nothing but an issue of political will, and that there is no technical opposition to its approval.
II- “With counter-cyclical aid, we would have significant budget slippages in case of major crisis”... “Setting trigger prices with 28 members is impossible!... Production costs vary greatly in Europe.”
Momagri’s White Paper shows that a counter-cyclical system is based on a more efficient budget in a multi-annual timeframe.
2) The decoupling of financial support is based on an outdated rationale, and fails to comply with CAP objectives. It has involved acquiring the social assent to dismantle European agriculture. Why? Because the European Commission has conceded to those who consider the productive scope of agriculture as useless and contrary to environmental protection.
The 2007 food crisis has again raised awareness on food security, which is gradually turning out to be a political issue.
Confronted to the current volatility of international markets and the crises it generates, the CAP subsidies can be justified by the protection of the European agricultural production capabilities.
3) The current system is very comfortable for the Commission, but by wasting budget appropriations during years of high prices, it does not have substantial reserves to deal with agricultural crises. In addition, how can it continue to defend the CAP’s fiscal reliability, effectiveness and “community added-value”?
4) As proposed in a recent report to the Parliament––the Garrido Report1––we see the first signs of a scenario where member states, which wish to do so, would themselves manage the variability of “their” agricultural budgets.
This direction could justifiably be of interest for some member states, with an additional step toward the renationalization of the CAP. Can the Commission deal with politically agreeing with the advocates of re-nationalizing the CAP, and thus the elimination of the chief European policy? Unless there is a development on budgetary annuality, the CAP is condemned.
5) But why are those who are supposed to protect farmers’ interests defending the same position as that taken by the European Commission’s?
Negotiating a reform does not involve immediately aligning with the positions of the negotiating partner. Protecting farmers’ interests leads to fighting on objectives, and not on means.
This is why it is unacceptable to hear the EU administrative body declare that a proposal––based on theory and without any initial impact study––is unworkable.
“You are right in principle, but the implementation is unfeasible” is a very weak argument, which demonstrates the fragility of those who oppose the idea...
1) Budgetary slippages are avoided by using historical reference acreages and yields for the determination of counter-cyclical payments.
We have performed simulations on past actual prices and based on especially pessimistic future price projections. While payments might be higher in times of low prices, average counter-cyclical aid does not generate budgetary slippages over a multi-annual timeframe.
On the contrary, our simulations are showing that budget outlays for the 2011-2020 years would be lower, and would remain below multi-annual projections between 2016 and 2020.
In addition, these test results confirm the budgetary feasibility of counter-cyclical mechanisms (see momagri’s White Paper “A new strategic course for the CAP ”).
2) The Commission’s publications on the subject also show that production costs are not so different as claimed.
For example: The European average total cost for wheat production was €215/ton in 2011, a figure used to set the equilibrium price. Yet, production costs in the various European regions mostly fluctuate in the price tunnel built around the equilibrium price (between €200 and €230/ton for grain). Thanks to its farm accountancy data network, Europe has access to all the data to set production costs all over Europe.
3) In our proposal, the threshold to trigger counter-cyclical aid is set at 93 percent of the equilibrium price that corresponds to the European average total cost.
The equilibrium price and the floor price are supposed to be relatively stable over time. They will vary according to a Council’s decision in case of a significant and lasting gap.
In the United States, the price threshold for counter-cyclical aid in the PLC program is set by Congress for a four-year period ($202/ton for wheat) in order to provide farmers with adequate visibility.
III- “Counter-cyclical aid will cause a domino effect on other activities… and could be detrimental to livestock farming as grain buying operations.”
Such argument shows a misconception of economic analysis and of the assessment of agricultural policies: Counter-cyclical aid has no impact on sales prices. This argument implicates the pre-1993 CAP, and has no relevance on the ongoing negotiations on counter-cyclical aid.
1) Counter-cyclical aid does not impact prices; How could they entail additional costs for purchasers? Such arguments does not hold water.
Calculating the support will not rely on the price actually received by farmers for their output, but on a yearly average of prices recorded on reference markets.
As a result, such a mechanism does not affect the marketing of crops.
2) 2) So that farmers continue to program their crop rotations depending on actual sales prospects and not depending on subsidies, counter-cyclical aid would be based on reference acreages and yields. In this way, one avoids to alter farmers’ anticipation patterns.
IV- “Insurance is better than counter-cyclical aid...”
It is hazardous to fuel the illusion of agricultural insurance to protect farmers from market risk. This type of risk is seldom insurable as it is a systemic risk. The major insurance firms are aware of it: In the current framework of the CAP, they are not able to extend contracts that adequately cover economic hazards.
1) While the interest of insurance companies against climate hazards cannot be called into question, revenue insurance or gross margin is increasingly discredited in the US, since it does not play the expected role of inter-annual levelling.
V- “As 1 out of 28, France will never be successful to get the counter-cyclical idea across Europe.”
2) Lastly, we must kill off the idea regularly given by the OECD that opposes insurance to government intervention, since insurance firms feel that the very existence of government intervention would prevent the development of private insurance programs.
The American example clearly shows the contrary: If insurance systems are so developed in the US, it is due to the existence of counter-cyclical subsdidies to cover high losses, and because the Risk Management Agency––a federal agency in charge of agricultural insurance employing 450 people–– designs insurance contracts, pays the subsidies and acts as reinsurer.
Ultimately, insurance companies will certainly have a role to play, but they will not meet farmers’ needs without a public policy to soften the extreme volatility of incomes thanks to counter-cyclical subsidies. Momagri promotes the development of various tools to meet various types of risks, as outlined in the chart below.
Lastly and to address this concern, we are suggesting that Farm Europe incorporates the counter-cyclical proposal in his work to determine if, as it seems to think, the proposal does not secure a majority of the votes among farmers, insurance executives and even political leaders. Failure to do so would mean steps to nip in the bud the mechanisms that have worked elsewhere.
Furthermore, we must stress the following points regarding this latest objection:
- As a joint decision-making body, the European Parliament will also have some input. And MEPs are becoming increasingly aware of the need to reintroduce regulatory tools in the next CAP. The idea of a counter-cyclical system is indeed gaining ground.
As proof, we note the open letter “A new strategic course for the European agricultural policy” signed by several MEPs––including Eric Andrieu, Marc Tarabella and Nicolas Caputo––and published in various member states (Belgium, Italy and Hungary among others).
We can also mention the draft of MEP Angélique Delahaye’s own-initiative report, “The CAP tools that can cut down price volatility in agricultural markets”, which includes counter-cyclical measures as means to manage potential crises.
- France is not one out of 28 nations as far as the CAP is concerned, but it is Europe’s number one agricultural nation.
- Lastly, the crisis that currently challenges livestock farming is leading most member states to take initiatives to support agricultural incomes, thus proving that all countries are not adverse to the advent of new regulatory tools.
Faced with the strengthening of agricultural policies worldwide, considering the future of the CAP solely through the prism of insurance as a tool to fight price volatility does indeed absolve the European Commission of any management responsibility, but yet condemns the CAP and our farmers.
Momagri will publish a new edition of its White Paper, “A new strategic course for the CAP” at the beginning of the summer 2016.
The 60-page report will present the latest budgetary simulations for the European budget and for farmers’ operating accounts.
We will be happy to send you a copy.