22 August 2019

The CAP doesn’t fit – why the EU’s farm subsidies are ripe for reform

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With the support of the Atlas Network, CapX is publishing a new series of essays on the theme of Illiberalism in Europe, looking at the different threats to liberal economies and societies across the continent, from populism to protectionism and corruption.

Richard Findlay is a farmer in the North York Moors National Park between York and Newcastle. As the Financial Times reported last year, Mr Findlay garners a profit of around £12,000 a year by grazing some seven hundred sheep. But even that £12,000 is quite a lot if one looks closer. Indeed, if it weren’t for subsidies delivered by the EU’s Common Agricultural Policy (CAP), Mr Findlay would be facing a loss of £32,000. Simply put, this farm would not exist if it were not for Brussels.

But Mr Findlay is far from the only farmer keeping his business alive through subsidies – the same thing is happening all over Europe. In the UK, 61% of the average farm’s profit comes from the EU’s direct payment scheme. On farms specialising in livestock farming, more than 90% of what is called ‘profit’ comes from subsidies.

The Common Agricultural Policy has been one of the most controversial parts of the EU’s work for decades – and it has certainly been a bugbear for many Brexiteers, who have long argued that it symbolises everything wrong with the way the bloc works.

When it was established in 1962 the original purpose of CAP was to secure that there was enough food for Europeans on a continent that was still wrought from war – or, in more technical terms, to achieve “food sovereignty”. And yet, as Europe became a continent of peace and trade with the world increased, the arguments for food sovereignty began to look a bit thin. Nonetheless, CAP was going nowhere. Not only did it stay in place, it actually expanded. By the 1980s, CAP accounted for over two-thirds of the entire EU budget.

While the share of the overall budget has since gone down – to 38% under the current six-year budget – it is still the largest financial program of the union. In addition, despite having decreased in relative terms, CAP payments still increased in absolute numbers until 2013.

At 38% of the budget, European taxpayers send more than €58bn to farmers each year – a shocking amount if one considers that farmers only make up 3% of the EU’s total population and are responsible for no more than 6% of its GDP.

Indeed, while the original goal of CAP was to enable farmers to feed Europe after decades of conflict, now it’s Europe that is feeding farmers through its massive subsidies. Their businesses often only survive because they are effectively bailed out – unlike big financial institutions, these are not one-off bailouts, but day in, day out.

If all of this sounds like protectionism and an illiberal economic policy it’s because that’s exactly what it is. That much was also clear from the strongly expressed opposition to a recent free trade agreement with Latin American countries from French President Emmanuel Macron and his colleagues from Ireland, Belgium, and Poland – all countries where farmers are profiting much from CAP. Politicians across Europe are fond of telling us that farmers need “protection” from the scourge of cheap imports, as if consumers’ interest in cheaper food were of no consequence at all.

And it’s worth looking at just how high the costs to consumers is. Even Oxfam, not exactly famed for its opposition to government spending, calculated in 2006 that a British household had to pay an additional £832 a year for food because of CAP (it should be noted that another study for eastern and southern European countries that just entered the EU found a smaller inflationary effect on consumer prices). Most hit are, of course, low-income households, where higher prices on day-to-day goods have the greatest effect on their overall means.

Worse still, Brussels’ protectionism seems to explicitly favour big business over small and medium-sized farmers. The Heinrich-Böll Foundation, a think tank associated with the German Green Party, found that between 2003 and 2013, over 25% of farms in Europe went out of business. And indeed, it is mostly small farms that vanish, while bigger corporations get even bigger.

The figures certainly bear this out – more than 30% of the direct payments go to only 2% of recipients and 80% go to 20% of farm businesses. These are not even necessarily farmers, but include companies like Tate & Lyle, the British food and beverage supplier. You might not expect a company that is included in the FTSE 250 and had £2.7 billion of revenue last year to be in need of government help. Still, according to Farm Subsidy, they have received €896.2 million since 1999.

They are not the only ones. Nestle has received €625.9 million, the German sugar producer Südzucker has trousered €77.3 million despite taking in €7.7 billion of revenue, and the French producer of sugar, starch, and bioethanol, Tereos, despite revenues of €3.6 billion, was eligible for €355.8 million.

Perhaps even more surprising, Queen Elizabeth II’s country retreat in Norfolk, the Sandringham Estate, has received £700,000 annually, the Windsor Castle £300,000, and Prince Charles £100,000 thanks to CAP. Indeed, the Royals get about £1m a year in CAP subsidies. Is this really what the EU was designed for, to redistribute money from taxpayers to big companies and aristocrats?

But it gets worse. As has been well-documented, subsidising farms that would otherwise have gone out of business inevitably leads to oversupply. In the early stages of CAP this was perfectly depicted by the infamous “butter mountains,” where much more butter was produced than was actually needed.

Today the butter mountains have been replaced by less visible byproducts of overproduction. Excess European farm products, from milk to wheat, is sold to African countries for an extremely low price made possible by the subsidies. The prices are often so low that they make it impossible for African farmers to compete, driving those very farmers out of business and destroying their already meagre incomes.

A German documentary details how the perverse incentive structure works in the case of Senegal: local farmers are unable to compete with wheat imported from Germany – the local products are often three times as expensive as the imported goods. That is partly because African farmers have been unable yet to increase productivity to similar levels as in Europe, but also because German companies are able to sell their goods at low prices because of subsidies.

In one case, a Senegalese farmer had just found a new way to raise productivity significantly – and, ironically, his work on the innovative project was financed by foreign aid from the EU. Even with improved productivity, however, he was unable to find buyers for his goods, because they were still twice as expensive as the subsidised European equivalent. As the documentary correctly explains, “it’s absurd that the EU is sponsoring local produce on the one hand, but preventing it on the other through its own trade policy”. It’s no surprise that the EU has come in for criticism for this policy.

Of course, Europe is not alone in experiencing problems created by its own government-sponsored programs. In the 1980s, New Zealand, which was largely dependent on its agricultural exports, had a farm industry in which 40% of incomes came from subsidies. Overproduction happened there too – in one year, some six million lambs were rendered down because no one wanted them.

As well as overproduction, New Zealand’s heavily subsidised farmers also sparked outrage among their international competitors, who threatened to respond by imposing tariffs.  The response of the then Labour government was radical: in 1984 it decided to cut all farm subsidies – yes, in their entirety. Unsurprisingly, farmers were up in arms and had to endure economic hardship in the years that followed – prices that had been kept artificially high thanks to subsidies quickly fell, as did the value of farmers’ land.

But after a while farmers adjusted. Now fully in charge of their own farming practices, they responded to the new-found self-responsibility and freedom. They used fewer pesticides and less water, meaning that ending subsidies was actually a boon to New Zealand’s environment.

What’s more, the farming sector started to diversify. Though defenders of CAP sometimes claim it supports an impressive breadth of products, New Zealand shows that niche areas can thrive without government intervention. Under the subsidy regime, New Zealand produced 35 products based on milk, today there are 2,200. The country’s wine industry has also gone from strength to strength.

Meanwhile, the incentives provided by an unfettered market have seen significant gains in productivity. Nor did the farms that previously relied on subsidies suddenly fail. In fact only 1% of farms actually went out of business in the years after the subsidies were cut off.

Writing back in 2002, the then head of New Zealand’s Federated Farmers, Tony St Clair, made the point clearly. Arguing for the EU to scrap the CAP, St Clair said that, far from destroying New Zealand’s farms, removing subsidies had “transformed the country’s agricultural sector into a world leader”.

Of course, the success of one country with a certain policy does not mean that the same policy will work anywhere else in the world – Europe and New Zealand are very different places. Nonetheless, a major rethink of the EU’s agricultural system is dearly needed, even though it will be a long way to go to make actual changes.

After all, while some of the dire consequences of CAP are well known, very little has been done to actually reform the system. This is not overly surprising if one considers that in the European Parliament, most members of the agricultural committee have ties to the industry.

As The Guardian reported last year. Europe’s farm lobby is one of the strongest and most cohesive forces in the political arena of the continent and any opposition, any questioning of CAP, will be met with fierce and comprehensive counter-attacks. One such example has been the outcry following the European Commission’s proposal to cut the CAP budget by 5% in the next long-term EU budget and to put a cap on subsidies for recipients – it is not clear yet what the result of this battle will be.

And yet, this is the time – and this is one of the issues where one should – courageously step up and argue for a fundamental rethink of a cronyist system that is long past its time (if there was ever a time for it). The Common Agricultural Policy hurts consumers and taxpayers; it puts small farmers in complete dependence of government welfare as they still lose out against their dominant competitors, who themselves are propped up even more by receiving hundreds of millions from their fellow citizens; it hurts farmers in developing countries who are unable to compete with subsidized goods that are dumped on their countries; and, indeed, it has led to the EU’s agricultural policy to take a life of its own which is in many regards inimical to liberal democratic principles.

The market would prove a way out of this disaster. It is high-time to get rid of what is surely the worst policy of all by the European Union.

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Kai Weiss is a Research and Outreach Officer at the Austrian Economics Center and a board member at the Hayek Institute