Can England's future farm policy provide a model for the CAP?
New Agriculture Bill presents an opportunity to deliver a modern, efficient and effective farming policy - and Brussels should take note
While many people find the prospect of Brexit regrettable for a number of reasons, not only in the EU but also the UK, for analysts interested in the design of agricultural policies it involves at least one positive element.
England (and the UK's other devolved administrations) will no longer be bound by the EU's Common Agricultural Policy. Instead, they can now push the reset button and come up with their own brand-new farm policy regimes and show the world, and the EU, what a modern, efficient and effective agricultural policy looks like.
On behalf of the UK government, Defra Secretary of State, Michael Gove, has now indeed placed his finger on that reset button and presented an Agriculture Bill to the UK Parliament that outlines the contours of what he sees as the future of England's farm policy after Brexit.
While much of the detail of the future policy regime still needs to be defined, Defra has already clearly indicated in which direction it aims to take England's agricultural policy for the post-Brexit era.
Seen from the perspective of the CAP as pursued so far by the EU, the fundamental orientation of the Bill can well be characterized as transferring the emphasis, and the funding, from Pillar One to Pillar Two.
In other words, rather than continuing to make the CAP's traditional direct payments for ever, the plan in England is to use the money so far spent on these per hectare payments in future for paying farmers when they provide public goods.
The Agriculture Bill is supposed to create the legal framework for a future policy regime dubbed Environmental Land Management policy. Under that policy, farmers would receive payments for various activities. Several examples of public good provision for which farmers could expect compensation are mentioned in the government's related press release.
These examples include activities such as:
improving air and water quality and soil health (eg. reducing ammonia emissions or soil erosion); providing habitats for wildlife (eg. maintaining hedgerows, nectar plots for pollinators or food sources for farmland birds);
reducing flood risk (eg. planting trees and hedges);
preventing climate change (eg. through peatland restoration to protect the existing carbon store and reduce emissions of CO2);
improving public access to the countryside (eg. replacing access structures such as gates);
protecting iconic features of the countryside (eg. maintaining drystone walks or other historic features).
Activities such as these are a good illustration of the many types of public goods that farmers can provide. If and where society wants these public goods to be provided, over and above of what anyhow results from market-led agricultural production, farmers have a good reason to request financial compensation out of the public purse.
This is precisely what is meant by the slogan 'public money for public goods'.
Departure from direct payments
Conversely, there is no good argument for continuing indefinitely to grant direct payments on a per hectare basis, with or without cross-compliance requirements.
Such payments, which appear to be written in stone under the CAP, were once justified when old-fashioned price support was reduced and eventually eliminated. Europe's farmers needed to be given time to adjust to the new policy without price support. However, once sufficient time had been allowed to make such adjustments, this justification had elapsed.
The UK government has embraced that insight by declaring that direct payments must come to an end. But it also accepts that policies must not change overnight without the individuals affected being given time to adjust.
It therefore does not propose to eliminate the direct payments made so far under the CAP immediately when England is freed of the straightjacket of Europe's farm policy. Instead, the proposal made in the context of the Agriculture Bill is to reduce the direct payments gradually over seven years, beginning in 2021.
Defra has not yet announced the precise time path of payment reductions, except for specifying the maximum reduction rates in the first year of the agricultural transition (with higher reduction rates for larger sums of payments per farm).
Indeed, the Agriculture Bill leaves open the possibility that there may be only one reduction step (in the first year).
Design of the agricultural transition
There are many other elements regarding the transition to the proposed policy regime for England's farming industry that are worth highlighting as well.
First, the fact that direct payments will be phased out during the seven-year agricultural transition is announced clearly and explicitly. Farmers therefore know what to expect after 2027 and can take the appropriate decisions, be it regarding their farming operations or their private lives.
Having announced the phased elimination of direct payment so expressly there may also be a good chance that a future government will not reverse the decision, yielding to potential pressure to halt the decline of the payments or even re-introduce full payments again.
The credibility of the phase-out could be enhanced if the full-time path of reductions were to be announced rather soon.
Second, during the agricultural transition from 2021 to 2027 the remaining payments will be delinked from the requirement to farm the land and, one would hope, from any other cross-compliance conditions. The economic value of payments for the farmer is of course higher if no strings are attached to them.
Third, the government can allow payment recipients to request a lump sum in lieu of two or more annual payments they would otherwise receive in future years. This is a rather useful feature of the Bill as it allows farmers to take early steps, be it on the farm or in other activities, when adjusting to the new policy regime.
The lump sum feature is also logically connected to the delinking element as it would be difficult to control the future farming practices of a farmer who has already brought forward any forthcoming payments.
As has been pointed out already, the Bill's provisions for direct payments and their phasing out exhibit quite some similarity to a proposal for a bond scheme made nearly thirty years ago by this author and later analysed in more detail in a joint research project with Professor Alan Swinbank.
At the time the bond scheme was proposed as a central element of a desirable fundamental reform of the CAP. More recently, though, both Professor Swinbank and I have also proposed use of this idea in the context of moving to a new national farm policy in the UK after Brexit.
The Bond Scheme revived?
It may sound strange to suggest that there is similarity with the proposed bond scheme. After all there is no capital market element in the Agriculture Bill while our original proposal was that the government issues a certificate to each farmer guaranteeing her/his future stream of delinked (or 'decoupled' as named at the time) payments.
The farmer could then take that certificate to the capital market and sell it like a bond, thus converting the guaranteed future annual payments into a lump sum that could be used to make investments helping with adjustments to the new policy regime.
Under the Agriculture Bill the government in fact adopts the role of the capital market, converting future annual payments into a lump sum.
There is no fundamental problem with that. After all the government can also go to the capital market to finance the lump sum payments. Conversion of annual payments into a lump sum can, though, only work if the government actually proceeds with announcing the time path of future payments.
This is another reason why it appears advisable for the government to soon go beyond the current Agriculture Bill and announce the future payment schedule, not only for the first year of the agricultural transition but for the whole seven year transition period.
As we pointed out in our publications on the bond scheme there are a number of practical issues that need to be clarified when a scheme of that nature is implemented. For example, how should tenant-landlord relations be taken into account? At the time we suggested options for dealing with such matters.
The Agriculture Bill and the press release going along with it contain a number of other interesting elements, relating to a wide range of matters such as research and innovation, the balance of powers in the supply chain, the UK's commitments in the WTO as well as dealing with exceptional market conditions. These elements were summarized in an earlier article in IEG Policy.
London outpaces Brussels
As it happens, preparations for Brexit coincide with the deliberations regarding the EU's budget for the post-2020 period, and in that context with the debate about the future of the CAP.
Even though they contain a number of interesting and promising elements it can be argued that rather than outlining a progressive policy the Commission's proposals are fundamentally geared towards maintaining the most decisive components of an outdated regime.
Against that background, Defra's Agriculture Bill comes at an opportune moment. It demonstrates how a farm policy can look if it relies on policy measures that have the potential to attain important objectives of both society and the farming community in an effective and efficient way.
Public money is scarce and needs to be used wisely. Spending it to incentivise farmers to provide specific and well defined public goods is a much more promising way than to spread it indiscriminately over the whole territory in the form of payments per hectare.
The view that direct payments are needed, and an effective way, to support farm incomes has long been shown to be misguided.
The UK government can be proud to have embarked on the path towards an agricultural policy regime that can serve as a model for the future of the CAP.
It is to be hoped that tensions between Brussels and London over Brexit will not distract attention among the EU-27 for how an agricultural policy can be designed if it extricates itself from the burden of dependence on its own historical path. When will Brussels push the reset button for the CAP?
Stefan Tangermann is an internationally-renowned agricultural economist who writes for IEG Policy on a range of policy-related issues. He is a former Director for Trade and Agriculture at the Organisation for Economic Co-operation and Development (OECD), and is a retired professor at the Department of Agricultural Economics and Rural Development at the University of Göttingen, Germany.