Markets policy and risk and crisis managment measures - CAP post 2013 1

Markets policy and risk and crisis management measures

CAP for after 2013 ?

Vincent CHATELLIER

INRA SAE2 Nantes (France)

European Parliament

Workshop COMAGRI

7th February 2011 - Brussels

Markets policy and risk and crisis managment measures - CAP post 2013 2

A few words about the heart of the CAP reform

Compatible tools (low intervention price, end of export refunds, income insurance)

How to integrate considerations other than commercial? For the developing countries: future level of tariff protection?

CAP and WTO

Face to strong ambitions : EU budget and CAP budget? To a new distribution of the CAP budget between Member states? A significant shift of support from Pillar I to Pillar II? Some modifications for co-financing and subsidiarity?

The European budget (2014-2020)

The pragmatism of the EC is very important (no flat rate model for SFP)

The reorientation of the SFP is necessary (volatility ; historical basis)

The ceiling of direct payments per farm is justified (with subsidiarity)

The issue of “beneficiaries” is not trivial The new architecture is to specify (indicators, LFA in the first pillar…)

Targeting and redistribution of support (« The devil is in the details”)

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DG Agriculture and Rural Development

The CAP Budget (in % the total amount)

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Part 1 :

Prices volatility, explanatory factorsand effects on farmers income

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FAO – Food price index

The FAO index for food price (general index : 55 products)

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FAO – Food price index

The FAO index for food price

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Sensitivity of supply to climatic hazards (despite the technical progress) Supply is rigid in a short term (production cycle) Demand is inelastic (little variation depending on price)

Agricultural markets are unstable

Agricultural production costs ; demand in countries with oil production

Oil prices

More volatility in the short term…but what long term effects?

Speculation in agricultural markets

WTO ; uncoordinated responses of countries to the volatility

The reform of agricultural policies and lack of coordination

Corn grain (USA) and sugar cane (Brazil)

The development of biofuels

Explanatory factors of the food price volatility

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INSEE – IPAMPA Index

Average production cost in farms (example: France)

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SSP - FADN

Farm income per family AWU (example: France)

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Risks in agriculture and the farms strategies

Yes, but the CAP encourages the specialization Decoupling, economical efficiency, work simplification...

The Pillar II measures may encourage diversification Short circuits ; agri-tourism ; crops / cattle breeding

The diversification of activities (agricultural or not)

Risks related to production cycle (bad weather, accidents, etc.)

Risks related to markets (price volatility)

Risks related with marketing (product sales)

Agriculture : a risky activity

More autonomous production systems Arbitration between autonomy, labor productivity and economic efficiency

Purchase the intermediate consumptions in a collective way Stocks in a long term

Limit the volatility of intermediate consumptions prices

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Part 2 :

Markets policy and risk and crisis measures

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Border protection through tariffs

A loss to taxpayers (customs revenue, but…direct aid)

A loss to producers (lower prices and competition)

A gain to consumers (lower prices in short term…but security in a long term?)

The theoretical effects of lower tariffs

An average cut in bound tariffs (developed countries: -54%)

A tiered formula for reducing tariffs A small % of products declared « sensitive »

The WTO negotiations on tariffs

Incorporate new dimensions to the debate: environmental, social,…

In case of serious crisis: possible use of exceptional tariffs

Sectors not really sensible : cereals (and also pork, milk : no import)

One sector very sensible: beef (but some changes in Brazil since 2009-2010)

Strengthen the EU standards, traceability and differentiation

What strategies for the EU?

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Export refunds

All forms of export subsidies will be removed Export refunds ; disciplines for state commercial enterprise ; export credits

Food aid: some stricter rules Encourage financial donations to purchase food in the bordering regions/countries

They are condemned by WTO rules

Innovation and competitiveness of agribusiness

Exchange rates in the long term (Euro / USD)

Some hopes: growth of international trade ; difficulties in some exporters (Australia)

Export refunds were helpful especially in times of crisis (milk, sugar, pork,

…)

This justifies to maintain intervention prices at low level

What strategies for the EU?

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Against volatility : stocks, flexibility, transparency

Stocks are expensive and trade must play a role

Priority for poor countries (difficult access to food)

Safety stocks by major areas: yes, but…

A choice that would cost the industry…who will support?

An adjustment of biofuels production to the cereal market situation?

A multi-year framework with some flexibilities from year to another

Towards greater flexibility for the budget of the CAP?

Improve the quality of statistical information

More transparency in transactions in derivatives markets

Limit the number of positions by institutional investors

Towards a better supervision of financial speculation (G20)

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Public intervention and safety nets

To cope with temporary market crisis For long-term crisis…it’s better (more efficient) to grant subsidies

Their utilization should be rare Positive trends in international prices

Small influence on incomes and their distribution Intervention prices are often lower than costs of production

Productions are more or less concerned (extension to others?)

- Beef: 1 560 €/t ; market deficit in the EU (95%) and in many countries

- Sheep and goat meat: a private storage aid ; market deficit in the EU (80%)

- Pork: abandonment of public intervention (not used)

- Milk: butter (30 000 T / 2 218 €/t) ; WMP (109 000 T / 1 700 €/t)

- Cereals: wheat (3 Millions T / 101.3 €/t)

The maintenance of safety nets, to a low level, is useful…

Are we at the end of the road?

A long process of institutional prices decline since 1992

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The instruments of risk management

Useful to anticipate the future margins (sale prices - costs)

No impact on prices trends over the long term

A tool which is especially built for standardized products

An inexpensive tool for public policies

Farmers : a need for training

Futures markets

A collective tool…adapted in some sectors (ex : fruits et vegetables) Producer organizations ; few other regulatory instruments

Mutual funds

To cover production risks against climatic hazards

France : enhancing of the tool – Health check of the CAP 133 million euros / partial coverage (65%) of contributions

Climate insurance

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The instruments of risk management

Tax policies have to be more suited to a context of volatility Avoid unnecessary investment, multi-year management of the economic performance

Some systems already exist… In France : Provision for climatic hazards (DPA) ; Provision for investment (DPI)

…but we must go faster and farther Transfer of direct aid from one year to another ; investment savings plan

The precautionary savings

Use the opportunities offered by the WTO agreement Annex 2 : Income decrease > 30% ; compensation < 70%

Benefit from foreign countries experiences Canada : “agri-Stabilité” ; USA (Average crop revenue Election)

An optional system for member states and farmers

Provide budgetary limits, and then set the thresholds and rates

Income insurance

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From public regulation (milk quota) to private contracts

A good efficiency for supply control (price stability ; low cost for public policies)

A contribution to the geographical distribution of supply (for some

countries)

Milk quotas have/had some advantages

A non optimal allocation of resources

An artificial increase in costs (quota market)

A rigid system face to the opportunities of international expansion

An instrument of the past (abolishment of the other intervention instruments)

Milk quotas have/had limits

A hope: a growing global market (Oceania : some difficulties to develop)

Contracts: to consolidate the link between producers and industrials Price: balance supply and demand (competition between countries and

enterprises)

Key concepts: production costs ; transport costs of milk

For disadvantaged areas: targeting support + « quality package »

Risks and opportunities

Markets policy and risk and crisis managment measures - CAP post 2013 19Thank you for your attention…good work on the next CAP