Even though the ink is hardly dry on the 2013 CAP reform, thoughts are turning already to the prospects for the next reform. In this presentation I discuss the likely economic context for agriculture in the coming years and some of the main issues - direct payments, market crises and risk management, greening, soil health and climate policy - likely to be on the agenda for the next CAP reform. However, those seeking reform will have to address a widespread sense of 'reform fatigue'.

1. THE CAP AFTER 2020
Alan Matthews
Professor Emeritus of European
Agricultural Policy
Trinity College Dublin, Ireland
alan.matthews@tcd.ie

2. The next CAP reform – already?
• CAP2013 is still being phased in
• 2015 first year implementation new
Basic Payment Scheme
• 2015 approval of majority of Rural
Development Programmes
• 2015 abolition of milk quotas
• 2017 abolition of sugar quotas
• 2018 latest date for redrawing of
Areas of Natural Constraints
• 2019 End-date for countries
transitioning from historic model of
direct payments

3. CAP built-in agenda 2015-2020
• Juncker’s mission letter to incoming Commissioner
• charged him with “reviewing the potential for further simplification in
the areas of direct payments and in particular as regards greening,
rural development, quality policy and the fruit and vegetables
scheme.”
• Other priorities specifically mentioned included renewing efforts in
the agricultural sector to contribute to energy efficiency and
emissions reductions
• Contributing to the 2016 review of the MFF by identifying ways of
further increasing the focus of the CAP on jobs, growth, investment
and competitiveness.
• Hogan’s confirmation hearing before the Parliament
• Simplification and subsidiarity strategy
• CAP mid-term review “once there is sufficient data”

4. CAP built-in agenda 2015-2020
• 2016 review of experience with EFA’s in first year to
assess if there is a noticeable reduction in production
• 2017 evaluation of EFAs before end-March accompanied,
where appropriate, by a proposal for a legislative act to
increase the arable area covered by EFAs from 5% to 7%.
• Hogan commitment to widen this review to cover other aspects of
simplification of direct payments
• End 2016 mid-term review of the MFF – ‘revision clause’
• Will determine, inter alia, duration of next MFF
• End 2018 first report on performance of CAP under the
common monitoring and evaluation framework
• End 2017 Commission must present proposal for new
MFF – will propose CAP budget for period after 2020

5. Outline
• Context for the CAP 2020 proposals
• Issues for the next CAP reform
• Future of direct payments
• Future for market crisis and risk management measures
• Future for greening
• A longer-term question – drawing the line between what we require
farmers to do and what we compensate them for doing
• Soils
• Climate
• Summing up - another CAP reform in 2020?

6. CONTEXT FOR THE CAP
AFTER 2020

7. The outlook for EU farm income?
Trends in in EU agricultural income per work unit, Indicator A
(2005=100)
Source: Eurostat
The last reform took place during a period of
relatively favourable farm income
development – the next one might not

8. Future farm incomes determined by terms
of trade and productivity growth
Source: OECD-FAO Agricultural Outlook 2014-2023, 2014

9. Changing agricultural competitiveness
EU farm competitiveness
adversely affected by
higher energy prices
compared to US

10. Slowing productivity growth
Source: http://capreform.eu/more-thoughts-on-the-european-innovation-partnership-for-agriculture/
Overall productivity growth is difficult
to measure, but appears to be flat in
recent years

11. Agricultural competitiveness very influenced by
exchange rate movements
Rising line implies stronger euro
Falling line implies weaker euro

12. EU farmers now largely
producing at world market
prices except for some
livestock products

13. … but tariffs on agrifood imports still high (2012)
Product group US
MFN applied
EU
MFN applied
Animal products 2.2 20.4
Dairy products 19.9 52.9
Fruits and vegetables 4.7 10.7
Coffee, tea 3.3 6.2
Cereals and preps. 3.1 17.1
Oilseeds, fats & oils 4.8 5,6
Sugars and confectionary 14.4 32,1
Beverages & tobacco 14.0 19.9
Other agric. products 1.1 4.3
Agrifood (simple) average 3.4 13.2
13
Source: WTO World Tariff Profiles

14. Link to world markets means EU price volatility
will be higher in future than in the past

15. Structural change is ongoing and production is
increasingly concentrated
For more, see http://capreform.eu/family-farming-and-the-role-of-policy-in-the-eu/

16. Implications of the greying of European farmers
Source: http://capreform.eu/the-greying-of-european-farmers/

17. Diet and health issues becoming more important
Obesity growth rates are slowing, but remain high and with large social
disparities, OECD 2014

18. Market power in the food chain disputed
Source: http://capreform.eu/farmers-share-of-food-chain-value-added/

19. Social attitudes increasingly polarised

20. ISSUES FOR THE CAP
AFTER 2020

21. The legitimacy of direct payments
Source: DG AGRI (2010-2013 average)

22. Can direct payments be defended after 2020?
• Recall history – Justified (by economists) as an
adjustment mechanism, therefore transitional measure
• Introduced first, but then abandoned, by US
• Payment to farmers with very unclear rationale – no
production required, not a targeted payment
• Justified as basic income support – but look at distribution

23. Distribution of direct payments
Source: DG AGRI

24. Can direct payments be defended after 2020?
• Justified as income stabilisation – but encourages
specialisation (monoculture) and crowds out private
alternatives
• Capitalisation into land values reduces value of support to
new and expanding farmers
• Adverse effects on generational renewal
• Compensation for higher standards relative to imports –
but no clear relationship (compare to ANC and AECM
payments)
• Potential incompatibility with WTO Green Box
• Key message: The 2013 ‘settlement’ re direct payments
is hardly a stable one, needs to be re-opened

25. Managing risk and crises in agriculture
• Part of market measures which also includes competition
in the food supply chain issues
• The current tool box
• Safety net intervention for some products
• Private storage aid
• Export subsidies (in situations of market disturbance)
• Tariff policy in cereals, fruits and vegetables
• Promotion policy, market withdrawal and free distribution
• Pillar 2 risk management toolkit (voluntary)
• Funded by crisis reserve (€400m annually at 2011 prices)
• National income support under state aid policy
• Risk management – reduction, mitigation and coping
• Public action crowds out private efforts, e.g. we now see the
development of risk-sharing contracts in the dairy sector

26. Managing risk and crises in agriculture
• Issues are to do with scale and scope of measures
• Scale
• Are budgeted resources sufficient?
• Can budget flexibility be increased? Within the principle
established that crisis management measures are financed from
the agricultural (direct payments) budget?
• Scope
• Heightened need for risk management if Pillar 1 direct payments
reduced and tariffs are lowered
• Supply management (and increasingly intervention/storage
policies) not effective in globalised market (dairy vs fruit and veg)
• Risk management at EU level benefits MS very unevenly; hence
‘unusual’ decision to place the toolkit in Pillar 2
Key message: Use this period of relative calm to promote market
and private action alternatives

27. How best to pursue greening?
• Despite areas of improvement, environmental problems due to
agricultural practices will still be high on agenda in 2020
• Sustainability seen in opposition to growth and jobs agenda
• “The right test of the effectiveness of greening measures is their
impacts on … long-term productivity, and thereby food security, and
not short-term production” (Buckwell, 2015)
• Environmental objectives pursued through:
• Regulation (Nitrates, Water Framework Directive, pesticides etc).
• Direct payments in Pillar 1 (cross-compliance and green payment)
• Voluntary AECMs in Pillar 2
• Options in future reform
• Extend Pillar 1 green payment approach further (larger share of direct
payment ceiling, additional practices required, the ‘Deß’ proposal)
• Revert to Pillar 2 approach by transferring green payment into Pillar 2
for additional AECM measures
• Use the 30% (or more) budget for green payment for new
environmental fund to be managed by DG ENVI

28. How best to pursue greening?
• Objections to Pillar 1 approach (green payment)
• Very weak green measures with very limited environmental impacts
because they need to be ‘simple, annual, generalisable’
• No link between payment made to individual farms and ecosystem
services rendered
• No encouragement to manage the land in ways that would
maximise environmental outcomes
• Poor perception by farmers (regulatory burden rather than contract
for services provided)
• Requires continued high Pillar 1 payment to ensure compliance

29. How best to pursue greening?
• Objections to Pillar 2 approach
• Voluntary approach (even if mandatory for MS) means low take-up
in regions with most intensive agriculture
• High transactions costs to deliver payments to farmers
• Past AECMs have been criticised for lack of environmental
effectiveness
• Dislike by MS of co-financing requirement under Pillar 2 compared
to Pillar 1
• Risk to enforcement of cross-compliance measures if Pillar 1
payments reduced

30. How best to pursue greening?
• Key messages
• Environmental damage to be controlled by regulation under
polluter pays principle (see next slide)
• Incorporate GAEC standards into statutory instruments
• Explore greater scope for market mechanisms to reduce compliance
costs
• Contractual payments for environmental/ecological services in
Pillar 2 under provider gets principle (see next slide)
• Move away from shallow schemes with flat rate payments to more
differentiated schemes despite higher transactions costs (results-
based approaches
• More emphasis on group schemes
• Explore use of market mechanisms to improve cost-effectiveness of
policy instruments (tradable EFAs?)

31. Farmers, property rights and the environment
• Polluter pays approach
• Social costs of all negative externalities should be fully internalised.
Studies show that the costs imposed on society by these negative
externalities, including water pollution, loss of excess nitrogen, soil
erosion, pesticide use, air pollution and greenhouse gas emissions,
can be substantial
• Provider gets principle
• Important role for payments which compensate farmers for
providing services which society values but for which markets do
not exist.
• Reference level or base line represents the demarcation
between environmental requirements with compliance
costs falling on the farmer and those measures that offer
farmers a remuneration for environmental commitments.

32. Farmers, property rights and the environment
• According to Commission:
• “the reference level is represented by mandatory environmental
standards, resulting from environmental legislation or cross-
compliance requirements. Beyond this reference level, agri-
environment payments can be applied.”
• Two problems:
• In the absence of Pillar 1 payments, some cross-compliance
conditions (GAECs) would become difficult to enforce because they
have no statutory basis
• How are the SMR’s (the legal obligations) shifting over time? How
should they shift over time? Two case studies
• Avoiding further soil degradation
• Reducing greenhouse gas emissions

33. Managing our soils
• The main threats to soils:
• erosion, organic matter decline, contamination, salinisation,
compaction, soil biodiversity loss, sealing, landslides and flooding
• Maintaining soil organic matter (SOM) should be in the
interests of farmers themselves, but deteriorating status
suggests a case for public intervention

34. Source: Hedlund 2015 http://users.unimi.it/ricicla/Lezioni/convegno_18-06-15/1-Hedlund.pdf

36. Managing our soils
• The main threats to soils:
• erosion, organic matter decline, contamination, salinisation,
compaction, soil biodiversity loss, sealing, landslides and flooding
• Maintaining soil organic matter (SOM) should be in the
interests of farmers themselves, but deteriorating status
suggests a case for public intervention
• Commission withdrew the Soil Framework Directive in April
2014 due to blocking minority in the Council for the previous 8
years
• Commission now reflecting on best way forward but remains
committed to objective of soil protection
• Key message: Need to consider soil carbon sequestration as
part of climate policy gives added urgency to greater focus on
soils in next CAP reform

37. Climate policy and agriculture
• More stringent emissions targets to 2030 will focus more
attention on need to reduce agricultural emissions
• Supply-side versus demand-driven reductions
• Changing diets and reducing food waste
• Increasing efficiency – “sustainable intensification”
• Substituting for fossil fuel energy emissions – bioenergy
• Carbon sequestration in soils, forests and other woodlands
• Policy design to incentivise emission reductions
• CAP 2013 Pillar 2 policies extremely weak
• Incorporating LULUCF sector into the EU climate policy framework
• Applying the polluter pays/provider gets principles to agricultural
emissions

38. Treatment of agricultural emissions
internationally
• Voluntary incentive schemes
• United States, EU countries
• Inclusion in compliance offset schemes
• California’s mandatory cap-and-trade, offsets can amount to 8% of
the allowance, including agricultural projects in US, Canada and
Mexico
• Australia 2011 Clean Energy Bill, those liable can cover up to 5% of
their obligations with domestic agricultural and forestry credits
certified by the Carbon Farming Initiative
• Canada: included ‘cropland management’ under KP Article 3.4
• US: land use offsets were proposed in failed Waxman-Markey cap-
and-trade bill
• Voluntary offset schemes operate in various EU countries
38

39. Treatment of agricultural emissions
internationally
• Inclusion in carbon levy/cap-and-trade scheme
• New Zealand had proposed in include agriculture in its
ETS from Jan 2015, with compliance obligations set at
processor and fertiliser supplier level
• Withdrew the proposal in 2013
• The Government indicated biological emissions from
agriculture will only incur surrender obligations if there
are technologies available to reduce these emissions
and its international competitors are taking sufficient
action on their emissions. Agricultural producers are still
required to report on their emissions.
39

40. Implications of climate policy for the CAP
• Cost-efficient emissions reduction policy requires coverage of
agricultural and land use emissions
• This is not guaranteed under current design of climate policy
(ETS/non-ETS) due to very different importance in MS emissions
profiles
• Also LULUCF not included in climate policy up to 2020
• New framework for LULUCF after 2020
• Include as a separate pillar
• Include as part of separate Agriculture, Forestry and Other Land Use pillar
• Include as part of the non-ETS sector
• Greater focus on sequestration services, especially soils,
needed in AECM measures
• Needs advances in monitoring, reporting and verification (MRV)
• Key message: 2013 reform paid lip service to climate policy.
Adjustment to climate policy can be key driver for next reform

41. ANOTHER CAP REFORM?

42. Another CAP reform in 2020?
• Don’t hold your breath!
• Extensive evidence of reform
‘fatigue’
• Focus now on growth and jobs
agenda at the expense of
sustainability?
• Lack of evidence on impact of
CAP2013 reform when preparing
next CAP proposals
• The awkward timetable given EP
elections and new Commission in
2019 (Matthews, 2015)
• 2020 changes most likely to be
minor tweaks
• But……….