Fischler's Mid-Term Review - Implications
Alan Matthews, Trinity College Dublin
The Fischler Review proposals, as revised in January 2003, differ from the earlier MacSharry and Agenda 2000 reforms of the CAP in that they focus more on `horizontal' measures rather than changes to market regimes. Proposals are made under five headings:
- Decoupling of direct payments
- Modulation and degressivity of direct payments
- Cross-compliance of direct payments with stronger environmental conditions
- Additional flexibility under Rural Development measures
- Market regime changes, including a further compensated cut in cereal intervention prices and accelerated and deeper reform of the dairy regime along the lines set out in Agenda 2000, but with the proviso that the quota system would be retained until 2014.
For Irish producers and policy makers, the proposals raise fundamental choices about the future direction of Irish agriculture. This talk will focus on three issues:
- whether decoupling of direct payments is desirable and what form this should take
- the future of milk quotas
- the future strategic direction of the agricultural sector
The parameters of the decoupling debate are by now reasonably clear, thanks to the Teagasc FAPRI-Ireland modelling work. Although production of the decoupled commodities will fall, there is the potential for an income gain for the farmers affected, depending on how the Commission manages the market for beef and sheepmeat and how significant imports from third countries become. Opinion poll evidence also suggests that farmers would value the simplification a decoupled payment would bring, even if the proposal lead to some fall in income.
If the decoupling concept were favoured, an issue is how best to design the decoupled payment. Should we support the link to historic entitlements, or should we take advantage of the flexibility proposed to pursue a single area premium? Arguments for and against will be examined.
If milk product prices were reduced as proposed in the Review and raw milk prices fell correspondingly, the value of retaining the milk quota would be reduced. A number of recent modelling studies have examined liberalisation of the EU milk market and the removal of milk quotas and their results will be reviewed. Three important messages emerge from these studies. First, liberalisation must be accompanied by compensation to be politically feasible. Second, if quotas are eliminated, it is important that compensation payments to producers are de-coupled, because otherwise output expansion will be higher and market prices will be depressed leading to a much larger negative effect on dairy producers. This is another important argument for favouring decoupling of the existing direct payment schemes. Third, if quotas are eliminated in the context of milk market liberalisation, it is highly desirable that this takes place in a multilateral context where other countries are also removing market restrictions. Thus, if we opt for quota removal, we should take an offensive strategy in the current WTO negotiations, not a defensive one.
The last issue is the most fundamental and most important. Agriculture is not immune to the whirlwind of change brought about by globalisation, de-regulation and the redefinition of the role of government in economic activity. On balance, these forces have been very positive for Ireland over the past three decades. Agriculture, has been protected from the full rigour of these changes by the mechanisms of the Common Agricultural Policy, but this may now be changing. The CAP budget ceiling to 2013 agreed as part of the EU enlargement negotiations and the ongoing WTO trade talks, if successfully concluded, will require a greater exposure to world market forces in the future.
Strategically, the issue is whether Ireland as a whole, or Irish agriculture in particular, has more to gain by defending the status quo or by facing up to the challenge of change. This is a debate about whether the longer-run gains offset the short-term costs of change. Provided that the interests of those currently in the industry are reasonably well protected, I argue that the industry has more to gain from embracing change.
