Agricultural subsidies and management of direct subsidies

Article in CajaSiete Blog, 08 february 2018

Leopoldo Cólogan

Garachico, North of Tenerife Island.

Why do agricultural subsidies exist? Where do they come from? Both questions take us back to the year 1962 – after the Treaty of Rome in 1957, which gave birth to the European Union – when the Common Agricultural Policy, better known as CAP, was established in a Western Europe conditioned by the shortcomings of the post-war era.

Its main objective was to ensure that citizens had a stable and sufficient food supply at an affordable price. In order to achieve this it was necessary to have a viable agricultural sector with market unity granting free circulation of agricultural products, protecting European Community produce and applying a principle of financial solidarity that would provide funding for established policies.

“In general, agricultural trade has demonstrated that it is better able to adapt to economic fluctuations than the trade of other goods.”

At first, it worked with subsidies and schemes that guaranteed good prices for farmers without raising the final price for consumers, which provided an incentive for the increase in production.

Once the objective of being self-sufficient had been achieved from both an agricultural standpoint and that of the farmer, the issue of over-production arose, which was the reason for exportation, which in turn affected other markets, donation, storage and, in the worst case, destruction. This led to the establishment of production limits in the context of a consumer society that had evolved and was more demanding in terms of sustainable development, the environment and human rights.

Such a situation meant that farmers had to adapt to the new market requirements and received direct income support. This in turn resulted in aid regardless of what the farmer produced being abandoned, which was termed the “single payment scheme”. Farmer pay was conditional upon compliance with various standards pertaining to the environment, food safety, plant health, animal welfare, agricultural practice and management, which make it possible to conserve the environment.

All this meant that the European Union became the main importer and second largest exporter of agricultural products in the world. What is the current agricultural outlook? The answer to this question is given by the annual report drawn up by the Organisation for Economic Co-operation and Development (OECD) – as its representative, Ricardo Díez-Hortleitner Rodríguez, current ambassador of Spain in Morocco, a person with special links to the Canary Islands and in-depth knowledge of its reality, held the role of ambassador of Spain between 2011 and 2015 – and the Food and Agriculture Organization of the United Nations (FAO), which was published on November 13, 2017, on “Agricultural Prospects 2017-2026”.

This report highlights the fact that, in general, agricultural trade has demonstrated that it is better able to adapt to economic fluctuations than the trade of other goods. It also indicates that over the last ten years agricultural land (including crop land and grazing land) has decreased to 62 million hectares and this trend is expected to continue. Countries with the largest amount of agricultural land are China, the United States and Australia, and China, India and sub-Saharan Africa are the ones driving global growth.

It is clear that these global analyses help to give us idea of the global situation and to define particular strategies, however, they do not always match local realities because each region is shaped by its geographical, climatic and political circumstances as well as its necessities. So much so that, as indicated in the same report, global growth patterns are changing as growth of demand in China slows, which is characterised by a sharp increase in the consumption of animal protein (fish, pork, etc.) and the demand associated with feed, while in other areas expecting population and income growth, preferences will be different to those of China.

In addition, I would like to emphasise the mention made in the report of the effects of public policy on food trade ranging from tariffs, quotas and subsidies to the export and distorting domestic support in all countries of the world; these domestic support policies may promote national production but not global production, which it may actually reduce.

The latter shows that there is domestic support for agriculture in all countries of the world, which obviously includes the United States and if it didn’t exist it would be a good thing for the world in general, but perhaps not for a specific region or country. Consequently, as I understand it, this points to the need to strike a balance to facilitate global development, increasing the quality of life in the most disadvantaged regions, and to not put global production in the hands of the few (as has happened with petrol), without asking any single region to give up its agricultural sector and its strategic plans.

These strategic plans are necessary for a country to be self-sufficient in situations of economic crisis, natural disasters, isolation or war, given that it takes a long time for a country to become productive and the fact that food scarcity brings out the best and worst in humanity and, unfortunately, from a historical perspective it is clear that economies, policies and countries are not always consistent and stable, they sometimes create problems regarding unnecessary issues, which ultimately affect their own economic and political stability, or that of their citizens.

On this point, what will happen to the Canaries and, more specifically, to banana production? It is considered one of the outermost regions of the European Union with annual aid regarded as direct payment intended for producers, capped at a maximum production of 420,000 tonnes.

To receive this, the producer is expected to comply with the legal requirements of active farmers according to Royal Decree 1075/2014 of 19 December which outlines a definition in the negative; in other words, it stipulates to which natural or legal persons, or which groups of such, aid shall not be granted, meaning that aid is granted to remaining producers.

That being the case, the owners of holdings that undertake activities that initially exclude them from aid, such as air transport, rail services, the collection, purification and distribution of water, property services, permanent sporting and recreational facilities, must demonstrate the following in order to receive it: That the annual aid represents at least 5% of revenue that the remaining non-agricultural activities yield, or that their agricultural activity is not insignificant (20% or more of total agricultural revenue without subsidies) or, in the absence of such, the scope of such and that they assume the entrepreneurial risk of such activity, or that agricultural activity appears as the main corporate purpose in its statutes, or account for its registration in the Special Social Security System for Farm Workers, depending on whether they are legal or natural persons, before the end date of the application period.

In this regard, it is worth bearing in mind Decree 2191/2016 of the Third Chamber of the Supreme Court in Administrative Matters, Section 4 of 11 October 2016, which, contrary to that stipulated in Royal Decree 1075/2014, states that, for the purposes provided in the previous wording of Article 8.3, all economic income, not just agricultural income, should be considered in the determination of whether the agricultural activity is insignificant or not, which brought about the current wording of Article 8 by Royal Decree 745/2016 of 30 December.

This issue is made relevant by the checks currently being carried out with regard to compliance with the aforementioned requirements.