speech-04-311_en

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SPEECH/04/311

Dr. Franz FISCHLER

Member of the European Commission responsible for Agriculture,Rural Development and Fisheries

The impact of CAP reform

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Thank you for coming to this meeting where I tend to briefly cover the state of playof CAP reform, its relevance domestically but especially internationally, and itslinkage to the ongoing negotiations in the context of the DDA.

The process of CAP reform is well known to all of you and I dont feel I need todescribe it in any detail. Although it is true that both the reform of 2003 and the morerecent one covering the Mediterranean products will be implemented during the2005-2007 period, and some variations do exist among Member States, the overalldirection and extent of the reform leaves no doubt about its scope:

At the end of the reform process the bulk of our support would have movedaway from productsupport todirect producersupport. Most of the latter wouldbe in the form of decoupled payments, i.e. payments to the farm for the provision

of public goods.

The provision of these public goods are guaranteed by cross-compliance, i.e.the respect of all these standards, be it environmental, animal welfare, foodsafety or quality standards.

Rural development would be strengthenedboth with the shift of funds awayfrom market and direct aid support towards rural development measures andmore importantly with the strengthening of the instruments available through

rural development programmes.

The balance of support available to our new Member Stateswould reflecttheir real needs and priorities for restructuring and for wider measuressupporting their rural communities.

The product coverage of CAP reform would include almost all sectorsof EUagriculture, with the notable exception of sugar (for which a proposal will soonbe available).

Even the most ardent critics of the CAP admit that this process is clearly significant.Yet, depending on the point of view of the various stakeholders, we have also heardarguments suggesting that either we have gone too far (admittedly such argumentare more confined to the farming or agribusiness community) or that we have notgone far enough (an argument obviously coming from outside the farmingcommunity).

With all due respect to these arguments, I think it is meaningless to attempt todebate or evaluate the impact of CAP reformin abstract terms; too far or not farenough with respect to what?

In my view the best way to evaluate the impact of CAP reformis with respect tothe clearobjectiveswe have set out to achieve:

- The CAP makes EU agriculture clearly more competitive than before. Thesignificant cut in support prices in all reformed sectors (Graph 1) has bridged the

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- The CAP makes EU agriculture clearly more environmentally friendly.Cross-compliance does not only imply reductions or even zero direct payments ifproducers do not respect standards. New rural developments policy instruments,new funds for rural development, and producer support that is decoupled from

production (and thus from the need to intensify production methods) all imply asignificant reorientation of incentives that enhance the positive contribution ofagriculture to the environment.

- The CAP is clearly more acceptable domestically. Its reform has beendemand-driven, reflecting all the priorities that our citizens have identified asrelevant to our policy objectives. It has also been driven by the need to maximisethe efficiency of the policy instruments we use, the manner in other words bywhich we support our farmers, given the budgetary constraint we face, thusrendering the value for money argument relevant in the whole CAP reformprocess.

- The CAP is also clearly more acceptable in the international context. Thebest way to judge that is not by evaluating it on the basis of slogans, bydefinition clearly more capable of catching the eye, but often prone to missingthe point, but by evaluating its real impact in the context of the DDA negotiation.CAP reform has not only provided us with additional margin in all three pillars -

domestic support, market access and export subsidies - but it has clearlychanged both the nature of the debate and the balance among negotiatingparties (to this point I will come later).

You could obviously argue that this is what you would expect to hear fromsomebody who has pushed these reforms through. So let me now try to argue froma different angle, not based on what we have been saying and doing but based onthe criticisms we have been hearing about the CAP and its alleged failures.

I do not intend to repeat here the list of such criticisms which, as you know, could belong. I would only like to focus on what seem to me the most credible of suchcriticisms, at least with respect to the often legitimate concerns they reflect, althoughsometimes these concerns are accompanied by inappropriate solutions.

I would summarise these criticisms by focusing on three areas, linked to the threepillars of the WTO negotiations in agriculture I mentioned earlier. In such a way, Icould try to put them into perspective with what is clearly a very timely issue, thestate of play of the DDA.

The most evident point of CAP criticism related to domestic supportis the allegedcost of the CAP. But here I think that, instead of going into details, one should gostraight to the point. To what are we comparing these costs?

To me the only relevant comparison is that of the cost of the CAP with respect to theoverall cost of public expenditure in the EU, less than 1% (Graph 2) for 7% of thepopulation; and the facts are very clear. Not only is the share of CAP in EU GDP

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Looking at the CAP cost evolution during the last two decades clearly shows thesignificant shift in the manner this support is given, starting in 1992 (Graph 3): lessfor export subsidies, less for market support (intervention stocks and the like) andmore direct aid to producers and to rural development; and that before we even start

the implementation of the recent reforms.

The impact of the latter reforms on the CAP cost structure is evident from Graph 4;even less will be spent in the future for market support, less for product-specificdirect aids, and more (most of the support) will go to decoupled payments. This isexactly the path of policy reform consistent will less trade-distortion based onprevious OECD analysis (Graph 5).

And since it is around this time of the year when misinterpretations of OECD

indicators are so common, a reminder: this exactly the policy reform path whoseimpact you will not seeby looking at OECDs PSE.

As our wheat example demonstrates (Graph 6), reductions in our domestic supportprice, export subsidies manner or tariffs have had no impact on the EU PSE forwheat (or other commodities) because the PSE aggregates the composition ofsupport (not just subsidies), but does not measure its trade distorting impact.

One more visible impact of CAP reform has nevertheless been on our position on

domestic support in the context of the current state of negotiations in DDA. No-onefocuses anymore on how to discipline CAP domestic support.

Rather the issue is how to force reform of US farm policies, while at the same timerespecting within the modalities framework the significant contribution of CAP reformin bringing down trade distorting support.

I would like to turn now to the external impact of CAP reform, and especially to itsimpact for on developing countries. To use as reference the other two pillars ofagricultural agreement, the issues at stake here are related to the impact of our

exports and of our export subsidies on world markets (the alleged dumping issue)and to our contribution to opening up our market for the developing world.

And what we need here is to move away from a competition of how to dump moreslogans and to focus on the real factors that determine developments in worldmarkets. This is not so much necessary for the CAP, but for preparing thedeveloping countries themselves for the real challenges they have to face.

Let me start with the export side, focusing on one development that is very clear

from a simple look at the facts: the EUnet-export position has declined in everysingle sector since 1990(Graphs 7 and 8). This has been not been the result ofsome accident but of the combined and cumulative impact of the reform process:lower domestic support prices also result in lower market prices, decreasing theexportable surplus by both lower production and higher consumption. They alsoresult in lower export subsidies.

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In sugar the dramatic increase of the exportable surplus in Brazil almost exclusivelyexplains the decline in world market prices (Graph 9). In cotton fluctuations in net-imports of China (a major player not only in cotton but also in synthetics) coincidewith major fluctuations that characterise world prices in that sector (Graph 10).

Does this imply that we do not need to reform developed country policies in thesesectors? On the contrary, both for domestic but also for international reasons neitherwe nor the US can afford not to reform - we have done so in cotton and hope thatthe US does the same. I will soon propose to do the same in sugar, and I hope thatothers follow here as well.

But we should have no illusions that by isolating one factor and focusing almostexclusively all debate on it, exaggerating in the process its real impact on world

markets, would in the final analysis benefit developing countries.The world is too complex to fit into such a simplistic scheme, too colourful to belimited by black and white analyses. Yet despite its complexity, the world iscertainly ready for a move into one area related to export policies, that of thecomplete elimination of allforms of export subsidisation:

- EU export subsidies, disciplined from the previous round and declining, but stilltrade-distorting, form;

- US export credits or food aid for surplus disposal, which without any disciplineshave assumed a major role of trade distortions in recent years;

- single-desk sellers retaining export monopolies and all sorts of governmentguarantees;

- differential export taxes, used to distort the composition of exports.

All these forms should have to go in full parallelism. Their elimination would certainlynot harm developing countries, as some now started to claim. Clearly defined rules

allowing action in emergency situations do not require product or origin specificity.They require the clear identification of needs and a clear share of responsibilities ofmeeting these needs.

Finally a few words on market access - few not because the issue is of lessimportance but it is of such complexity that we could spend hours discussing it. It isclear that in the current state of play of the DDA negotiations on the modalitiesframework for agriculture, the issue has become the trickiest to resolve. In a sensethis is to be expected.

Market access affects all WTO members, not just the two big elephants and someother developed countries as domestic supports and export subsidies do. It alsoaffects both importers and exporters, with diametrically opposed interest andsensitivities. Finally it affects developing countries in a very complex manner.

In addition, not only are most of the benefits from market opening going to come

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And our Everything But Arms agreement ensures that products from the leastdeveloped countries can enter the EU market duty and quota free. What we wouldlike to see now is other developed countries following a similar approach, or at thevery least allowing 50% of developing country exports to enter their markets duty

free.

But above all we would like to see in the negotiations a formula able to deliver thesame extent of detail as we expect in the other two pillars if an agreement of amodalities framework is to be agreed by July. Priorities and sensitivities areobviously very varied across this pillar, hence the need to come up with a formulathat can deliver a meaningful compromise.

And what the EU is keen to ensure here is that sensitive products are determined by

the parties concerned, and not automatically; that the final formula for tariffreductions takes account of these sensitive products; that the final result is a singlesystem that unilaterally addresses the need to make significant improvements inmarket access.; and that the developing countries, in particular the least developed,receive special and differential treatment.

I think I have by now covered enough space! So I would like to thank you for yourattention and turn to you for your comments.

Annex :The Common Agricultural Policy : reform and relevance for the developing world.

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7/17Brussels, 18 June 2004 Meeting with NGOs 1

The Common Agricultural Policy:The Common Agricultural Policy:reform and relevance for the developing worldreform and relevance for the developing world

FranzFranzFischlerFischler

European Commissioner Responsible forEuropean Commissioner Responsible for

Agriculture, Rural Development and FisheriesAgriculture, Rural Development and Fisheries

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Brussels, 18 June 2004 Meeting with NGOs 2

1. EU price support reductions1. EU price support reductions

-75

-60

-45

-30

-15

0

Soft wheat Durum wheat Rice Beef Butter SM Powder

% reduction

Support price reduction

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2. The cost of the CAP in perspective2. The cost of the CAP in perspective

Cost of the CAP (relative terms)

0%

10%

20%

30%

40%

50%

Share of GDP

CAP expenditure All EU public expenditure

CAP cost in perspectiveCAP cost in perspective

CAP costs indicate a clear trend:CAP costs indicate a clear trend:

a declining share in EU GDPa declining share in EU GDP

(from 0.54% to 0.43% to 0.33%)(from 0.54% to 0.43% to 0.33%)

a declining share in EU budgeta declining share in EU budget

a declining share in EU publica declining share in EU public

expenditureexpenditure

a significant shift in manner ofa significant shift in manner of

supportsupport

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3. The evolution of CAP expenditure3. The evolution of CAP expenditure

0

10

20

30

40

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

billion

Export subsidies Market support Direct aids Rural development

EU-10 EU-12 EU-15

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5


4. CAP budget support trend4. CAP budget support trend

0

10

20

30

40

1993 2000 2008

billion

Market measures Area/animal payments Single Farm Payment (minimum from 2003/2004 reforms)

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6


5. OECD evaluation of policies5. OECD evaluation of policies

0,00 0,25 0,50 0,75 1,00 1,25

Market Price Support

Input Payments

Output Payments

Payments on Area

Planted/Animals

Payments on Historical

Entitlements

Trade Effects, MPS=1

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7


6. PSE and EU wheat support6. PSE and EU wheat support

1992 = 100

0

30

60

90

120

150

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Price support Export subsidies Tariff protection PSE World price

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7. EU net export share (reform impact)7. EU net export share (reform impact)

0%

20%

40%

60%

80%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Wheat Beef Pork Poultry

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9


8. EU net export share (pre8. EU net export share (pre--reform)reform)

0%

20%

40%

60%

80%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Sugar Butter SMP Cheese

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10


9. What drives sugar prices9. What drives sugar prices

000 mt

0

4000

8000

12000

16000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

$ / mt

0

80

160

240

320

Brazil sugar exports (000 mt) Sugar price (FOB Caribbean)

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11


10. What drives cotton prices10. What drives cotton prices

-1000

-500

0

500

1000

1500

2000

2500

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

China net imports (000 mt) Cotton price (A index $ / mt)

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