The Impact of CAP Reform on New Zealand

31 December 2004

The Impact of CAP Reform on New Zealand

On January 1 2005, the new Common Agricultural Policy (CAP) regime for European Union farmers comes into place. Federated Farmers of New Zealand (Inc) President Tom Lambie explains how CAP reform will create opportunities for New Zealand.

European Union (EU) farmers are among the most heavily subsidised in the world, with over NZ $200 billion a year in support. This support was aimed to keep farmers to continue producing what they traditionally always have, with the dairy, sugar, beef and sheep meat industries the most heavily subsidised.

In June 2003, EU farm ministers adopted a fundamental reform of the Common Agricultural Policy (CAP), which radically change the way the EU supports its farm sector. Beginning in 2005, European Union farmers will still receive subsidies but the vast majority will instead receive support independent of how much or what they produce. Instead of a sheep and beef farmer receiving different payments for the number of sheep or cattle they had on the propriety at a particular time of the year that farmer will now receive a single payment based on the area of land farmed.

The new CAP is geared towards consumers and taxpayers, while giving EU farmers the freedom to produce what the market wants. Farmers can now choose what to farm, and not be tied to a particular production type. They will now rely on making judgements about consumer demand and the marketplace, and adopting new farming practices to remain profitable. This is a fundamental shift away from producing what they always have and expecting the taxpayer to pay the difference no matter how unprofitable.

Increased conditions are attached to the new support. To help farmers meet EU production standards more money will be targeted to farmers for environmental, quality or animal welfare programmes by reducing direct payments for bigger farms.

Severing the link between subsidies and production is designed to make EU farmers more competitive and market orientated. But what will happen to farm incomes? Most EU farmers will see only modest changes in the support they receive: the single farm payment will be based on historical entitlements and remain largely linked to farm size. Base incomes will also be more stable, as farmers will receive the same level of subsidy each year, regardless of how much they produce. However this will decline over time, as the agricultural budget has been capped.

So what does CAP reform mean for New Zealand? New Zealand has long argued for the elimination of output-based support. Such support stimulates production and tilts the playing field against unsubsidised producers, including farmers in New Zealand and in the food-rich developing countries. The reform means we can expect to see small reductions in total EU production of most commodities, but larger falls in EU export levels. There should be significant falls in volume of subsidised, price-depressing beef on world markets, and dairy producers should benefit from a reduction in EU export subsidies.

Farmers in New Zealand can be pleased that the European Union, in severing the link between subsidies and production, has at last taken this huge first step on the road to a market-based agricultural system. This reform will strengthen the EU's negotiating hand in the ongoing World Trade Organisation multilateral trade talks. It might also accelerate the removal of output-based support in the non-EU European countries, like the US and Japan.

CAP Reform will refocus EU farmers on consumer-focused, resource-efficient farming practices New Zealand has experienced over the last 20 years. CAP and other trade reforms offer New Zealand farmers many opportunities, but we must continue to be at the top of our gamein order to gain maximum benefit. In the long run both New Zealand and European farmers will be the winners.

ENDS

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