CAP may finally ensure viable rural economy after turbulence

Accession to the European Community in 1973 was enthusiastically welcomed by Ireland, largely because of the prospective benefits to agriculture which it promised.

At that time Irish agricultural exports were almost entirely dependent on the British market, and that market became progressively more restrictive as Britain became increasingly more self-sufficient.

Because the British market was not very rewarding, Irish governments were reluctantly forced to provide an increasing amount of income support for agriculture. Before accession, this support reached about 3.5 per cent of Gross Domestic Product (GDP), which may be contrasted with the cost of the Common Agricultural Policy (CAP) today to EU taxpayers at just 0.6 per cent of GDP.

Against this background EC membership offered the prospect of substantial price increases, a doubling of real incomes and unlimited market access. These were of enormous consequence, not just for farmers, but for the economy generally in which agriculture then represented about 50 per cent of total net exports.

The comprehensive CAP support system also promised stability. But in fact the 1970s turned out to be a period of unprecedented turbulence. Inflation rates were high, interest rates were rising and exchange rates fluctuated.

A new vocabulary had to be learned by farmers in relation to agricultural trade. "Green Pound" price increases became the grist of agricultural news bulletins, as agricultural ministers bargained for more price increases via manipulation of exchange rates.

In effect a dual exchange-rate system had come into being, one pertaining to general money markets and the other relating to agricultural prices under the CAP. As this monetary chaos was unfolding in 1974, a crisis was developing in the beef sector. At world and EU levels, beef markets swung from scarcity to oversupply.

In Ireland cattle numbers had been increased rapidly in anticipation of EC markets, but winter feed supplies had not been increased proportionately. Then, as misfortune would have it, appalling weather struck in the summer of 1974 leading to an acute feed shortage that winter.

Farmers desperately tried to sell off their cattle, but all market outlets were choked, including factories slaughtering for intervention. As a result cattle prices tumbled. Happily the 1974 cattle crisis was transient and prices recovered strongly in the following years.

Indeed, the agriculture sector as a whole entered a boom period, and despite all the turbulence average real incomes per worker had in fact doubled by 1978, as had been forecast before joining the EC. Of course, around this average there was a very wide range of individual farmer experiences.

The boom up to 1978 laid the foundation for the next crisis in Irish agriculture. Not only were incomes high and rising, but the prospects were also promising.

Admittedly, the problem of surplus production was increasing all the time, and sooner or later it would have to be addressed. Yet there was no immediate threat to the high level of incomes. Given these expectations, farmers and finance institutions engaged in the greatest bout of investment and borrowing ever experienced.

By 1979 the indebtedness of farmers was at record levels. This would not have been a problem if incomes remained high as had been expected. But in 1979 and 1980 incomes collapsed, on average falling by a half and reverting to their pre-EC level. This was caused by exchange-rate movements which could not have been anticipated in 1978.

In March 1979 the European Monetary System (EMS) was launched with Ireland as one of its members. This radical change in Irish exchange-rate policy did not seem to threaten the well-being of agriculture.

It was argued that either the Irish inflation rate would have to fall to German levels - in which case high price increases would not be necessary, or the Irish currency would be forced to devalue - in which case "Green Pound" price increases would be forthcoming.

But the Irish inflation rate did not fall in 1979 and 1980. Nor was it found necessary to devalue the IR£within the EMS, as the tradeweighted exchange rate of the IR£was maintained by an unexpected revaluation of sterling. This plunged Irish farmers into a severe price-cost squeeze.

Escalating interest rates, which doubled between 1978 and 1979, compounded the problem. Farmers and bankers, who had borrowed and lent with buoyant expectations, now found themselves with the severest debt problems since the Economic War of the 1930s. Both parties had to compromise to solve the problem, and with the help of recovering incomes most farmers were able to restructure their debt and survive.

The major policy initiative of the 1980s was the imposition of quotas on milk production in 1984. Up to that date dairy surpluses continued to grow, increasing pressure on the CAP budget to unacceptable levels.

Ministers were forced to react, and the choice available to them was between slashing prices to reduce surpluses or the introduction of quotas to restrict production at farm level. Ireland initially resisted the quota approach, arguing that its dairy industry was still underdeveloped and that quotas would stunt its growth.

In the end we had to settle for quotas after hard bargaining yielded a 10 per cent bonus in the size of our quota over other member-states. Milk quotas are still with us, and the Commission is now proposing to continue them until 2006.

They have the advantage, for those producers with quotas, of ensuring a high price for restricted production. However, those with little or no quota are frozen out of the industry unless they can afford to pay high prices for the limited quota that becomes available. Furthermore, the Irish and EU dairy industries are rapidly losing world market share as other exporters, such as New Zealand, are free to expand to supply those growing markets.

Despite the imposition of quotas on our most profitable farm enterprise, farm incomes continued to improve through the 1980s and into the 1990s. This was the result of a number of factors, including a continuing drop in the labour force, a sharp fall in interest rates and the debt burden of Irish farmers and, in recent years, a rapid rise in direct payments to farmers. The main event of the 1990s to date was the MacSharry reforms of the CAP which were implemented over a three-year period from 1993. These reforms were indirectly a part of the Uruguay Round trade negotiations, as they were made to enable the EU to accept the disciplines in agricultural trade of that emerging agreement.

The MacSharry reforms had three main components: reduced prices for beef and cereals/oilseeds/protein crops offset by direct payments to farmers; extension of supply control beyond sugar and milk - where it already applied - to beef, sheep and cereals/oilseeds; and a set of Accompanying Measures consisting of an environment protection scheme, an early retirement scheme and a forestry promotion scheme.

When MacSharry revealed his proposals in 1991 they were bitterly attacked by the farming organisations. Yet farmers' incomes actually rose between 1992 and 1995. However, incomes fell in 1996 and 1997, and further reductions are likely in the years ahead.

The evolution of the Accompanying Measures is also of interest. The prospective value of these was impossible to quantify because their detailed operation and their uptake were unknown. Nevertheless, the Department of Agriculture, Forestry and Food did go on record as saying that they could amount to £55 million per year. The budget provision for them in 1998 is some £300 million.

After eight years of negotiation, an agreement was finally reached and came into operation in 1995. It extends over six years to 2001. The commitments made by all countries under the agreement relate to reducing domestic support, increasing market access and reducing export subsidies.

However, by tough bargaining, the EU succeeded in keeping these commitments to a minimum. As a result, the agreement is not having major short-term effects. Its real significance is that for the first time in history it has put in place a set of common rules which will be built upon in future trade agreements.

Talks towards the next agreement are to begin in 1999. Already the Commission has outlined its train of thought in a strategy paper published in 1995 and more recently in its Agenda 2000 proposals. Basically the Commission is proposing further reform of the MacSharry type. In addition, the EU is committed to opening negotiations for enlargement in April 1998.

Further reform of the CAP must therefore be such as to simultaneously accommodate the demands of the EU's trading partners and the accession of a number of central European countries.

The debate on the future of the CAP will intensify over the next few years and will climax in 2001. Any future trade agreement will have to extend the Uruguay Round commitments beyond those already agreed. This is very significant because, while the Uruguay Round effects will be modest up to 2001, any extension of commitments beyond that date will intensify pressures on EU markets.

It may take several years to arrive at a new agreement, thus postponing its adverse impact. Further trade liberalisation in the EU will have to be bought with more compensation as in the MacSharry reforms. However, the new compensation is likely to be less generous, due to market outcomes, to size of farm and to environmental concerns. Irish grassland production could fare well under these guidelines.

Looking ahead a decade or so we can anticipate four streams of income for farmers: income from farming at prices approaching world market levels; payments by way of compensation for price reduction; non-farm income of farming households which has been growing and should continue to grow; and payments for environmentally-friendly practices, and for rural development. The hope will be that these four streams will be sufficient to maintain a viable rural economy in Ireland.

Seamus J. Sheehy is Professor of Agricultural Economics at UCD

Tomorrow: Peter Brennan of the Irish Business Bureau in Brussels on regional funding