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EU measures to stabilize farmers’ income: Low uptake coupled with overcompensation, say auditors

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EU instruments helping farmers to insure their income against falling prices and production losses have only partially met their objectives, and their uptake remains low and uneven, according to a new report from the European Court of Auditors. In addition, some exceptional measures have not been properly targeted and can lead to disproportionate compensation payments, say the auditors.

The EU's common agricultural policy (CAP) contains a range of measures whose purpose is to guarantee a stable and adequate income for farmers. Direct payments to the 6.4 million farmers in the 28 member states account for €41 billion per year. Alongside these direct payments, the CAP includes specific instruments for preventing and managing risks and crises in the agricultural sector.

For example, insurance and mutual funds can be used to stabilize farm income. There are also exceptional measures which are intended to stabilise the market as a whole in the event of serious disturbance, such as when Russia decided in 2014 to ban certain agricultural imports from the EU.

The auditors looked specifically at whether these tools had been implemented efficiently and were delivering results. They focused in particular on the EU's support for insurance and the exceptional measures introduced for the fruit and vegetables sector following the 2014 Russian sanctions.

The auditors acknowledge that the CAP contains a variety of income safeguards. Direct payments play a significant role in this regard. On average, they account for a quarter of farm income, allowing farmers to cope better with failing prices or lower production, and thus reducing their need to insure. At the same time, the CAP increasingly promotes preventive measures, especially by encouraging farmers to adopt good agricultural and environmental practices. The auditors found, however, that this activity has little impact on farmers’ behaviour, since insured farmers may have less incentive to apply a resilient business strategy or adapt to climate change.

Most of the €2.6bn which the EU has budgeted to help farmers insure against price volatility and production losses has had little impact, the auditors say. The money reaches a very small share of farmers, as fewer than 10 % of those who insure do so with EU support. Most farmers do not even consider mitigating risk as they expect to receive substantial public aid anyway in case of a crisis.

In addition, EU support for insurance is not channelled to those in real need. In the two member states making most use of it (Italy and France), the auditors observed a concentration in the wine sector. In this sector, where insured capital can reach €115,000 per hectare, many beneficiaries, given their financial capacity and risk profile, would have insured their production even without EU subsidies.

“There is currently limited evidence of the EU added value of this support for stabilizing farmers’ income,” said Samo Jereb, the member of the European Court of Auditors responsible for the report. “Measures should be further targeted, so that they can be used by those farmers which need them most and in a way that does not conflict with the development of a more preventive and resilient EU agriculture.”

Regarding the €513 million spent for fruit and vegetables in 2014-2018 in response to the Russian ban, the EU did not set objective parameters to consider its use. For instance, 61 % of the support went to apple producers (mainly in Poland), although apple exports remained roughly constant or were even growing. Exceptional measures have also been applied to other fruit (such as peaches and nectarines) to address structural overproduction within the EU, rather than one-off market disturbances.

Lastly, the auditors note that EU support for withdrawing products for free distribution has been costly. In some cases, the rates paid have largely exceeded market prices and thus allowed overcompensation. In addition, the auditors found that most products withdrawn for free distribution schemes have ultimately returned to the market in a different form (as juice in Greece and Spain, for example), while only a fraction reach people in need.

Against the backdrop of recent legislative proposals for the future CAP, which seek to increase the focus on risk management, the auditors recommend that the European Commission:

  • Encourage farmers to better prepare for crises;
  • better design and monitor its support for insurance;
  • clarify the criteria for triggering and ending exceptional measures, and;
  • adjust compensation for withdrawal operations.

Special report 23/2019 “Farmers’ income stabilization: comprehensive set of tools, but low uptake of instruments and overcompensation need to be tackled” is available on the ECA website in 23 EU languages.

In November 2018, the ECA issued its opinion on the Commission’s legislative proposals for the future CAP.

By the end of 2020, the ECA also plans to issue a special report on the exceptional measures the EU took to counteract the 2014-2017 dairy market disturbances. Some €740m was spent in this sector, partly to compensate farmers for sanctions by the Russian Federation. The related audit preview was published in October 2019.

The ECA presents its special reports to the European Parliament and the Council of the EU, as well as to other interested parties such as national parliaments, industry stakeholders and representatives of civil society. The vast majority of the recommendations we make in our reports are put into practice.

Agriculture

Publication of latest agri-food trade figures: Slight increase in EU27 agri-food trade despite Coronavirus and Brexit challenges

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The latest monthly agri-food trade report shows that between January and May 2020, the total value of EU-27 agri-food exports rose by 2% compared to the same period in 2019, reaching €75.8 billion, while the value of imports increased to €52.7bn (a rise of nearly 1%).

However the monthly values of EU-27 exports and imports in May 2020 decreased by 7.5% and 4.5% respectively below the level of the previous month. The EU enjoyed an agri-food trade surplus of €23.1 billion during this period, an increase of 5% compared to the corresponding months of 2019. The growth of EU exports was driven by exceptionally high sales of pig meat to China and of cereals to the Middle East and North Africa (MENA) region.

The value of EU exports to China rose by €1.93 billion during this period. In addition to pig meat, the other EU agri-food products in high demand from China were wheat, offal meat, and infant food. Strong demand for EU barley and wheat led to increases in exports to the MENA region. The total value of EU agri-food exports to the UK fell by €899 million, while, imports from the UK dropped by €807m. Declines were also noted in the value of the EU's imports from the USA as well as EU export values to the USA.

The full report is available online and more information on agri-trade policy is available here.

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Agriculture

Protecting Europe’s #farmers needs more coherent policies

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European agriculture is at a crossroads. As policymakers in Brussels debate the reform of the Common Agricultural Policy (CAP), the European Commission finally rolled out the roadmap to its flagship Farm to Fork strategy, the bloc’s first comprehensive food policy, while a free trade agreement with Mexico, if ratified, could have significant effects on the EU’s agricultural sector. But what’s woefully missing in this flurry of international deal making and regulatory tweaking is protecting farmers from unfair competition and artificially inflated prices.

Strict regulations at home, more flexibility abroad?

The sweeping free trade agreement with Mexico, which the EU finalized in April but which still needs to be approved by the French parliament, has already sparked a fierce backlash from farmers everywhere. Chief among their concerns is the fear that the agreement will usher in unfair competition from Mexican farmers. By exempting nearly all Mexican goods from EU tariffs, the free trade agreement opens the door to some 20,000 tonnes of Mexican beef a year and huge quantities of Mexican pork and poultry—products which were heretofore excluded from the European market over health and safety concerns.

European agricultural associations have been alarmed by the trade agreement and warned that it risks kicking off a “race to the bottom” for environmental and safety standards. At the very moment that the Farm to Fork strategy seeks to raise the standards for Europe’s food by imposing strict standards on farmers, it’s nothing short of perplexing to allow imports of foodstuffs from countries with less stringent regulatory regimes.

Above and beyond the concerns that the free trade agreement could see European consumers ending up with food items that don’t conform to the bloc’s usual health and safety requirements, European producers will naturally be at a disadvantage vis-à-vis Mexican farmers who don’t have to bear the extra costs of complying with European health and safety measures.

Overtaxing essential fertilizers cutting into European farmers’ profits

Even if the new trade deal with Mexico is not ratified, there are other policies which are cramping European farmers’ competitiveness and imposing extra costs on them. While the EU’s agricultural sector is becoming more efficient in its nutrient use, hefty tariffs slapped by the EU on some of the most widely-used nitrate fertilizers, however, represent a significant extra cost which European farmers have warned is harming their ability to compete on the global market. According to French trade unions, fertilizers represent up to 21% of farmers’ costs, and keeps input costs artificially high as most of demand is satisfied by imports.

“It’s a new attack on our revenues and the competitiveness of French producers of grains, oilseed crops and beetroot”, proclaimed one French association of agricultural unions. The producers of these crops are unable to switch products and are unable to pass these increased operational costs to consumers, meaning that they are left with little choice but to eat into their margins.

Margins scraped thin

This is particularly problematic given that European farmers are currently being buffeted on all sides by financial headwinds. Even before the coronavirus pandemic, the latest Eurostat assessment of the performance of the EU agricultural sector, from November 2019, showed farmers’ input costs—for fertilisers as well as for other necessary items like seeds and animal feed—rising at a faster pace than the value generated by the agricultural sector.

The Eurostat report also noted that most EU member states saw declines in real income in the agriculture sector, with some countries, such as Denmark, recording extremely steep declines bringing them in line with 2005 lows. What’s more, farmers’ incomes in the EU-27 have consistently lagged behind the value added in the broader economy—even with substantial support from the Common Agricultural Policy. A steady decline in the agricultural labour pool has further strained the sector, and the CAP’s efforts to address the growing labour shortage have so far yielded mixed results.

Covid-19 highlights the weak spots in European agriculture

The coronavirus pandemic has only exacerbated these structural problems and piled pressure on European farmers. Supply chains were dramatically interrupted. Some farmers were forced to destroy their crops or to let them rot as shuttered borders across Europe prevented seasonal workers from travelling to harvest the produce.

Despite crisis funding from the EU, surveys have indicated that EU farmers’ confidence in the sector has plunged amidst the public health crisis. According to one recent survey carried out by Ipsos, a third of large EU farmers are now questioning the long-term viability of farming as a business, while 65% of the EU’s agricultural producers predict that they will see negative revenue impacts for the next two or three years.

In order to mitigate the effects of the crisis, the farmers polled called on the EU to do more to control price fluctuations and to prevent distorted competition. It was clear even before the pandemic that there were flaws in the EU’s agricultural policy—from allowing foodstuffs from less strict, and therefore less costly, regulatory regimes to be imported through free trade agreements, to imposing extra costs on European farmers in order to protect European fertiliser producers—which were whittling away already-narrow margins in the bloc’s agricultural sector. With the industry in crisis amidst the coronavirus pandemic and the accompanying economic downturn, the EU can no longer afford to place these burdens on its farmers’ shoulders.

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Agriculture

Commission approves €370 million Czech scheme to support enterprises in the primary agricultural sector and in food and feed production affected by #Coronavirus outbreak

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The European Commission has approved a CZK 10 billion (approximately €370 million) Czech scheme to support enterprises active in the primary agricultural sector and in food and feed production affected by the coronavirus outbreak. The scheme was approved under the state aid Temporary Framework. The public support, which will take the form of direct grants, will be open to all enterprises active in the primary agricultural production sector (farmers) and to food and feed producers.

The aid is specifically intended to ensure sufficient working capital for beneficiaries, which suffered a decrease in total earnings of at least 25%, compared to the same period in 2019. The measure is expected to support between 12,000 and 20,000 enterprises. The purpose of the scheme is to address the liquidity needs of farmers and to help them continue their activities during and after the outbreak. The Commission found that the Czech scheme is in line with the conditions set out in the Temporary Framework. In particular, (i) the aid will not exceed €100,000 per company active in the primary production of agricultural sector or €800,000 per company active in food and feed production and (ii) the scheme will run until 31 December 2020.

The Commission concluded that the measure is necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a member state, in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework. On this basis, the Commission approved the measures under EU State aid rules. More information on the Temporary Framework and other actions taken by the Commission to address the economic impact of the coronavirus pandemic can be found here.

The non-confidential version of the decision will be made available under the case number SA.57848 in the state aid register on the Commission's competition website once any confidentiality issues have been resolved.

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