The agricultural component of the Omnibus : a reform that opens the door to the securitization of the agricultural crisis
Jacques Carles – Chief Operating Officer, Momagri, Frédéric Courleux – Advisor, Momagri
October 23, 2017
Sometimes presented as a true reform half-way into the 2014-2020 CAP, the negotiation on the agricultural component of the Omnibus regulation just ended between the Parliament, the Council and the European Commission. Are the results of this negotiation up to expectations? Opinions are divided, some believe it is an ambitious deal, others are doubtful. We are choosing the later quite clearly, for three reasons :
- The significant amendments on crisis management were thrown out ;
- The “improvements” on competition law for producer organizations (PO) are actions and practices that cooperatives already handle ;
- And, despite the changes that were made, mutual economic funds (also called income stabilization tools) will stay inactive, or at least we should hope so, otherwise they would be a path to the securitization of the agricultural crisis.
No regulatory translation of Commissioner Hogan’s main achievement
Of all the different amendments introduced by parliament to offer a stabilized legal basis to the production reduction schemes, none were accepted. This measure is, to this date, the main (some would say the only) success of Commissioner Hogan. Introduced by his predecessor in the regulation of the common organization of the market, this measure led, for a small amount of money (150M€), to rebalancing the milk market and escaping most of the crisis at the end of 20161. Ironically, the Commissioner and his services are showing some difficulties putting this measure in the spotlight: never were these types of measures brought up during the conference around the public consultation on the CAP last July 7th2.
We will then remain with the current version of the single CMO regulation and its article 219, which even though it is very vague when it comes to its terms and conditions, gives the Commission the power to implement such measures. Let’s note that these types of measures are not restricted to milk production, but could very well be used for other products.
Legalizing producer cartels to counter the effects of deregulation
In the end the only amendments that got through on risk management are those that modify article 222 of the CMO. This article gives farmers and the different types of producer organizations (including cooperatives and recognized POs) the possibility to derogate, temporarily, the rules of competition to exit a crisis with different measures including the production reduction scheme.
The main innovation introduced by the Omnibus for this “pro-cartel” article is that it can now be activated before even classic market intervention measures are. To recall, this article was used during the milk crisis without any effect: indeed, it isn’t enough to decide that producers have the possibility to form cartels for them to do it spontaneously. In the end, we could question the consistency of having to use legislation – even temporarily – creating producer cartels to counter the effects of a deregulation of markets pursued to ensure free competition.
Recognized POs, a substitute for cooperatives
About economic organization of producers, the main addendum to the regulation is the concept of “value sharing”. The new article 152b who, in reference to a recent regulatory clarification brought up for the sugar sector, says that “farmers, including farmer associations, and their first buyers may agree on value sharing clauses […]”. A role that is also given to interprofessional organizations to establish standard value sharing clauses.
There is therefore no obligation to define such clauses but only a possibility. We are back to the question of imbalance in negotiating power. How does a PO dominated by its unique buyer hope to implement value sharing clauses that are favorable to him and that will be upheld ? A contract has never rebalanced a trade relation; it is by modifying market structures that negotiating powers can balance themselves out. POs, even with the possibility to have value sharing clauses, will always remain less effective than cooperatives, who are bigger and moreover, have their own transformation units, and where value sharing is decided within their decision-making body (which is the case for sugar cooperatives even though they served as an example here).
With the Omnibus regulation, we are working hard; once again, to give prerogatives to recognized POs that will remain a poor substitute for cooperatives, the most accomplished form of producer organization. Some talk about breakthroughs, but competition law has never stopped producers from creating cooperatives!
For the dairy industry, the main breakthrough brought by the Omnibus is the suppression of the paragraph that limited the application of the decisions made during the negotiation of the 2010 milk package to the 30th of June 2020. Article 150 titled “Regulation of supply for cheese with a protected designation of origin or protected geographical indication” will still be relevant, which is good news in order to keep up the success of sectors such as Comté or Abondance. The possibility of extending this type of regulation to other productions unfortunately hadn’t been carried within the amendments to the European Parliament.
Mutual economic funds, materialization of cynicism
Introduced by the Commission at the same time as its impact analysis for the 2013 reform, the income stabilization tool (ISR or IST) didn’t encounter the success that was hoped by its promoters. Optional measure from the 2nd pilar (art.39), Italy was the main member state interested in implementing these mutual economic funds for economic risks, before eventually renouncing in the face of the tool’s limits3.
The Omnibus regulation brings several modifications: i) the funds can now be sectored, which means by product, whereas it used to be necessary to take into account the true income of farms which handicapped diversified farms ; ii) the threshold to trigger it was lowered for sectorial funds that will be triggered for decreases of income above 20% (70% of the loss may then be compensated) ; iii) price indexes will be available to calculate income losses ; iv) public money will be capitalized among the fund to feed the initial stock and in proportion of annual payments brought to the fund.
Despite these changes, the benefit and therefore the development potential of this type of tool remains limited for reasons both economic and political:
To this day, no other country uses this type of tool. The system that could come closest is the Canadian AgrInvest program. It is a program to push individuals to save, without any threshold to trigger it, and where the public bonus is limited to 1% of the revenue.
- They are the path to a renationalization of the CAP with many associated risks of a competition between regions and Member States depending on resources and prioritization,
- They constitute a form of privatization of the access to public support that would put another dent in the legitimacy of the CAP: only farmers able to pay during good years will be able to receive during bad ones. These funds being handled by economic actors themselves, the risks are not insignificant that might appear some forms of selection with unreasonable access ;
- If we suppose that these funds could be fed by the transformation or the distribution, wouldn’t it be preferable to evolve value sharing within sectors rather than having farmers count on what could be perceived as charity or paternalist schemes ?
- They require a strong supervision by authorities to avoid it transforming into “money machines” especially for products where prices in production could artificially be adjusted between producers and processors to optimize the functioning of the fund and therefore “leak” the maximum amount of public money
- Like all private risk management tool, they are inefficient against an irregular volatility where the lows of cycles are long. Especially, the circumstances being currently degraded for most productions, there establishment would require funds to use lends by using public money used as initial capital as leverage, which begs the question of the bails that would agree to support such projects.
The path to a securitization of the agricultural crisis
The political support from the European Commission towards mutual economic funds is even more surprising if we recall the pressure that it exerted in the past on the professional initiatives to create compensation funds handled by Unigrain notably and which, to be euro-compatible, could not in any way correspond to a form or another of subsidy. Why such a turn around?
Two possible explanations, and both as cynical, emerge. The first one is thinking that, as in all negotiation, it may be useful for the Commission, to give something to chew on to the stakeholders on subjects for which we know they have a low chance of ending but that would allow to occupy the negotiation space in order to keep control to not drift too far from the status quo.
The second reminds us that president Juncker, when he came into function, announced the mobilization of over 315 billion euros to invest in the European economy, the Juncker Plan. This amount which exceeds greatly the European institution’s capacity would be raised for the most part from private investors from the leverage constituted of 21 billion in public money over 3 years (6 billion in capitals and 15 in guaranties) and of 63 billion of contracted debt by the European Investment bank. Mutual economic funds whose public financing can be mobilized to pay interests on loans but also on the initial capital will then fully work within the Juncker Plan thanks to the Omnibus reform. The money from the CAP will then be able to attract private investors who will lend money to the mutual funds and their bails. From there to saying that, for some, the current agricultural crisis has some upsides because it increases the success rate of the Juncker Plan, there is only a step that we are taking intentionally. Agricultural land, farms and transformation plants at the hands of cooperatives are indeed assets that could interest people who carry a currently disproportionate amount of money.
In the end, the Omnibus reform doesn’t bring any solution to end the current agricultural crisis but on the contrary via the mutual economic funds, opens the way for the Juncker Plan which will translate into a securitization of the agricultural crisis. Which representative of agricultural interests will be able to walk towards the mutual funds? Rather than working to make the agricultural crisis more attractive to financial interests, it would probably be wiser to try and exit it; the future of the men and women of that sector depends on it.
1 For a presentation of the creation and implementation of the measure :
2 Some even say that the few public servants of the DG Agri who thought up the measure are now marginalized.
3 For info : the italian minister for agriculture has recently indicated his preference towards counter cyclical payments within the 1st pilar. See