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Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

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Food Price Volatility and EU Policies

Food Price Volatility and EU Policies

Chapter:
(p.457) 21 Food Price Volatility and EU Policies
Source:
Food Price Policy in an Era of Market Instability
Author(s):

Johan Swinnen

Louise Knops

Kristine van Herck

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198718574.003.0021

Abstract and Keywords

Changes in global food prices have affected EU producers and consumers and have triggered policy reactions through the EU’s political process. In particular, the EU and member states responded by social policies to protect their consumers, attempts to regulate ‘speculation’ on agricultural commodities, revisions of sustainability requirements for biofuels, international development and food aid, and changes in the EU’s Common Agricultural Policy (CAP). With the exception of biofuel regulations, policy changes have been relatively limited and the effects on global food markets minor. The reasons are that the impact of global price volatility on EU consumers has been limited and the link between the CAP and the world market is much smaller than it was twenty years ago.

Keywords:   EU, global food price, social policy, biofuel, food aid, Common Agricultural Policy

21.1 Introduction

The period 2007–11 was characterized by high volatility in global food prices. In many countries of the world this triggered important policy reactions with food exporters imposing export taxes or outright bans, and food importers lowering their import tariffs.

In this study we discuss the impact of the changes in world food prices on EU policies. We analyse how the changes in global prices have affected producers and consumers in the EU, and how this has resulted in policy reactions through the political process. We also discuss how EU policy changes, in turn, have influenced global food prices.

Traditional economic and political models of agriculture and food policies often focus on the impact of prices and policies on three types of agents: producers, consumers and taxpayers (see e.g., Gardner 1987; Swinnen 1994). Price changes directly affect producer and consumer welfare and may trigger demands by these groups for policy interventions. Because of expenditures on social policies and agricultural/food subsidies, taxpayers have always been an important actor in food policy discussions. In the EU their role in the policy debate has increased in recent years. With the shift from price and trade interventions to direct payments (in the 1990s), most of the support to farmers now comes through budget expenditures. In addition, the financial and economic crisis has had a major impact on member states’ budgets and on their fiscal policy. This affects their willingness to allocate funds to EU policies (including the Common Agricultural Policy (CAP) and food aid) and to spend on domestic social policies.

(p.458) Such a traditional political economy framework is useful when thinking about the economic and political relationship between food prices and EU policies. However, to get a more realistic perspective it is necessary to disaggregate the concept of ‘producers’ and ‘consumers’ and to include the impact on and influence of other types of agents––such as trading partners, landowners, environmental groups, the energy and financial sectors, etc. Landowners have lobbied intensively on EU farm policies in recent years as farm subsidies have been shifted from price and trade interventions to land-linked subsidies, directly affecting land prices (Swinnen and Vranken 2009; Ciaian, Kancs, and Swinnen 2010). Environmental groups have been increasingly vocal in agri-food policy debates and played a significant role in the 2003 reform (Swinnen 2008). As recent price spikes have been related to energy investments (‘biofuels’) and financial transactions (‘speculation’), policy initiatives to regulate these have drawn energy and finance interest groups into the food policy debate as well. Further, the relationship between EU policies and global food prices is influenced by pressure from trading partners (Josling 2008).

Finally, decision-making in the EU is affected by various institutional factors. Some policies are set at the member state level (such as social policies), others at the EU level (such as agricultural policies). Some policies can be changed on a short-term basis (such as management of food policies within existing policy frameworks), others are fixed in multi-annual agreements (such as EU budget allocations and major CAP decisions). For some policies the EU Parliament has co-decision power, for others not, and some policies are constrained by international agreements, such as the General Agreement on Tariffs and Trade (GATT)/ World Trade Organisation (WTO) agreements.

Given the length constraints of this chapter it is impossible to integrate all these different policies, actors and institutional constraints into a single, integrated model. We will therefore take a rather pragmatic approach, referring to key agents and institutions, which influenced policy decisions on specific policies.

21.2 Impacts of Changes in Global Food Prices in the EU

The period 2007–11 was characterized by high volatility in global food prices. Figure 21.1 illustrates how average producer prices in the EU followed a similar trend to global food prices, although the scale of these changes was much smaller than those of the Food and Agriculture Organization (FAO) food price index. Compared to the 2005 prices, average prices for producers increased by less than 20 per cent in real terms in the first price spike and even less (p.459) during the second price spike. Figure 21.2 shows that EU price volatility was lower than global price volatility indicators. There are important differences between agricultural commodities: EU cereal prices increased by 113 per cent, five times more than milk prices which increased by only 22 per cent between the first quarter of 2005 and the first quarter of 2008 (Figure 21.3). There are also large differences in price inflation between member states (see Swinnen, Knops, and Van Herck 2013).

Food Price Volatility and EU Policies

Figure 21.1 Evolution of EU 27 and global price indices (2005=100; real prices)

Source: FAO and EUROSTAT.

Food Price Volatility and EU Policies

Figure 21.2 Coefficient of variation for global and EU food prices

Source: FAO and EUROSTAT (based on Swinnen et al. 2013).

Food Price Volatility and EU Policies

Figure 21.3 Evolution of the ratio of cereal over fertilizer prices and the ratio of milk over animal feed prices in the EU27

Source: FAO and EUROSTAT.

These price changes are imperfect indicators of changes in producer welfare since they only capture part of the effects. Grain prices are output prices for grain producers, but input prices for livestock producers. In addition, there were significant changes in energy prices over the same period. The grain/fertilizer price ratio in the EU has been very volatile over the 2005–12 period, with a rapid increase in 2006 and 2007, a strong decline in 2008 and significant growth in 2010 (Figure 21.3). In contrast, the milk/animal feed price ratio has consistently declined since 2005. The 2012 ratio was 25 per cent lower than in 2005 as increases in dairy prices have been offset by increases in animal feed prices. Hence the impact of the global price changes on EU farmers was mixed.

There was little volatility in average consumer prices in the EU (Figure 21.1). The latter increased slightly over the 2005–12 period, with real food prices only 5 per cent higher in 2012 than in 2005.1 An important reason is that (p.460) (p.461) the cost of raw material is a small share of the price of the final food products in the EU. For example, the share of agricultural raw materials in the cost of bread is merely 5 per cent and on average 20 per cent for meat and livestock products (EC 2007).

The impact of these price changes on consumer welfare also depends on how much consumers spend on food. European consumers spend on average 15 per cent of their household budget on food. Changes of food prices therefore had a limited impact on the average EU household’s welfare. However, there are significant differences between and within member states. Poorer families spend more on food. The share of the household budget spent on food varies from 10 per cent in the UK to more than 40 per cent in Romania.

Other factors had a significant effect on EU consumer incomes over the same period: the increase in energy prices, increasing costs for transport, heating, etc., and the economic and financial crisis causing falling employment and wages. There was zero growth on average in the EU27 and unemployment increased by more than 2 percentage points between 2007 and 2012 (see Figure 21.4). Macroeconomic changes also seem to have impacted food prices. Average food prices fell over the 2005–11 period in the countries hit the strongest by the economic crisis such as Portugal, Greece, Spain, and Ireland.

Food Price Volatility and EU Policies

Figure 21.4 Evolution of real gross domestic product (GDP) and unemployment in the EU27

Source: EUROSTAT.

21.3 EU Policy Responses

The most important policy responses were: (i) policies to protect EU consumers; (ii) regulating ‘speculation’ on agricultural commodities; (iii) tightening sustainability requirements in the EU biofuel policy; (iv) international development and food aid; and (v) changes in the EU’s CAP.

21.3.1 Social Policy and Food Aid

Social policies, such as unemployment benefits, pensions and disability payments, are still the responsibility of the member states. The increase in food prices induced pressures from consumers, in particular the poorest, to increase social spending. Increases in other prices, such as those for energy and transport, reinforced this pressure. While the financial and economic crisis constrained governments’ budgets, social expenditures in the EU increased by approximately 7 per cent between 2005 and 2010 (Figure 21.5). Not surprisingly, there are large disparities among member states, but spending on social security benefits increased in almost all member states.

Food Price Volatility and EU Policies

Figure 21.5 Evolution of social expenditures in the EU27 (in real terms)

Source: EUROSTAT.

(p.462) Since 1987, the EU has a food aid programme for the poor and the needy of Europe. First, this scheme consisted of the distribution of stocks of surplus food. However, reforms of the CAP towards a more market-oriented policy in the 1990s and 2000s reduced the amount of surpluses in the EU. As a consequence, the food aid scheme was revised in 2008 to buy products from the market. In 2010, the European Commission (EC) put a ceiling of €500 million/year on it and in 2011, under financial pressure, the EC proposed a drastic cut to €112 million. However, aid organizations argued that it was precisely (p.463) in periods of rising food prices that such programmes were most needed. Negotiations took place on the amount of food aid and on (member states’) co-financing requirements. Several member states argued that ‘social policy’ is a national competence. An agreement was finally reached to maintain the level of funding for the (€500 million) for 2013 only.

21.3.2 Markets in Financial Instruments Directive (MiFID) 2: Fighting Speculation on Food Commodities

The first version of the (MiFID 1) entered into force in 2007, just before the financial and food crises. MiFID 1 and its implementation were seen as successful but recent changes in trading techniques (e.g., computer-based high frequency trading), coupled with the financial crisis, induced the EC to review MiFID to evaluate whether more regulation was needed.

Whilst the commodity and commodity derivatives markets were ‘exempted’ from MiFID 1, they now represent a focus-area of MiFID 2, in response to claims of speculation on food commodities.2 While there is increasing evidence that speculation did not play a major role in the food price developments of recent years (Irwin 2012), the EC launched a public consultation in 2010. This revealed a clear division between the stakeholders in the debate. Unsurprisingly, the financial actors made a plea for more ‘flexibility’ and argued that over-regulation of financial markets would be detrimental for (p.464) the entire EU economy, while a group of non-governmental organizations (NGOs) recommended that commodity markets should be further regulated to increase transparency and to discourage speculation.

It is unclear at this stage whether the outcome of MiFID 2 will effectively introduce regulation on commodity markets in the EU, as the EC proposal leaves latitude for different national implementations. This could allow strict regulation in some countries and more flexible regimes in others (with the UK clearly being in favour of a light regulation). The recent European Parliament (EP)’s response, amending the EC proposal, aims at removing loopholes and reinforcing the European regulatory oversight on commodity markets. A final agreement on has yet to be reached.

21.3.3 Strengthening Sustainability Requirements for Biofuel Production

The EC proposed what the press and industry have qualified as a policy U-turn on biofuels. From strongly encouraging this sector through binding targets and blending mandates (i.e., its target of 10 per cent of biofuel for transport by 2020), the EC is now backtracking and seeks to minimize the use of food crop-based biofuels. Biofuels have been an important driver of increasing food prices (de Gorter et al. 2013) and are claimed to be less environmentally-friendly than originally thought, because of indirect effects of land use change (Rausser and de Gorter, Chapter 20).

The 2009 EU biofuel sustainability scheme includes the following criteria: green house gas emissions (GHGE) savings from biofuels shall be at least 35 per cent; biofuels shall not be made from raw material obtained from land with high biodiversity or high carbon stock, or peat land; and EU agricultural raw materials used for biofuels shall satisfy the environmental requirements under the CAP. In 2012, the EC proposed limiting the use of food-crop-based biofuels at 5 per cent (EC 2012).

21.3.4 International Food and Development Aid

Somewhat paradoxically, despite high food prices the EU has not provided more (in-kind) food aid to poor countries. In fact Figure 21.6 illustrates that food aid declined from more than 3.5 million tons/year in the early 1990s, to close to zero. There are two reasons: studies showing that food aid could have detrimental effects on the local economies caused a shift from food aid towards development aid (OECD 2012a), and EU food aid was especially distributed when EU food stocks were high.

Food Price Volatility and EU Policies

Figure 21.6 International food aid by the EU (thousand tons of wheat)

Source: World Food Programme FAIS database.

Instead, in 2008 the EU established a €1 billion ‘food facility’, including measures to improve access to agricultural inputs and services, and safety net (p.465) measures to increase the agricultural production capacity and help meet the food needs of the most vulnerable. Whilst the EC presented the Food Facility as its ‘highest profile instrument’ in development aid (EC 2010), the EP questioned the automatic extension of this instrument, as its ability to tackle food insecurity had been rather difficult to assess. The EP also emphasized the need to adopt a global and comprehensive response, to overcome the proliferation of separate actions since 2008 (EP 2011).

In 2008, French President Sarkozy proposed to make price volatility a Group of 20 (G20) priority. The G20 ‘Action Plan on Food Price Volatility and Agriculture’ aimed, amongst other objectives, to improve and develop risk management tools for governments, firms and farmers in order to build capacity to manage and mitigate the risks associated with food price volatility, in particular in the poorest countries. In 2011, the G20 in Cannes––still under the French presidency––focused on improving the regulation and supervision of commodity derivatives markets, and in general on reinforcing transparency on agricultural markets (G20 2011).

21.4 The CAP and Global Food Prices

21.4.1 A (Very) Brief Historical Perspective

The relationship between food price volatility and the EU’s CAP is arguably the most interesting from a (global) food policy perspective. For decades, surplus production resulted from a CAP system which provided strong protection to EU farmers through guaranteed prices, high import tariffs, and export (p.466) subsidies.3 While this created stability on the EU market it created instability on world markets, and distortions throughout the economy. High import tariffs and growing surpluses, exported with subsidies, caused already low prices on global food markets to decline even further. This system was particularly important for commodities such as cereals, beef, sugar, and dairy products.

In the 1980s, pressure increased to reduce the CAP distortions both from inside the EU and from outside––most importantly from the EU’s trading partners and exporting nations and from developing countries and international organizations which argued that these policies were hurting the poor by contributing to low farm prices.

In response, the EU introduced a series of reforms to change the CAP into a policy system that maintains support to farmers, while creating less distortion on international markets (Josling 2008; Swinnen 2008). Reforms in the 1980s introduced supply constraints (quotas) in the sugar and dairy sectors. Reforms in the 1990s reduced price supports, tariffs and export subsidies and replaced these by payments for land and animals. These reforms were part of the Uruguay Round Agreement on Agriculture (URAA) of the GATT/WTO.

After 2000, partly in anticipation of a Doha Round agreement, the single farm payment (SFP)––a payment decoupled from production––was introduced (Swinbank and Daugbjerg 2006).4 These reforms resulted in a decline in agricultural support in the EU, and in particular in a strong decline of the use of the most distortionary instruments (Figure 21.7). Agricultural support, measured by the Organisation for Economic Co-operation and Development (OECD)’s % Producer Support Estimate (PSE), declined from approximately 36 per cent in the period 1991–3 to approximately 20 per cent in 2009–11, and the %PSE for the coupled support fell below 10 per cent. Similarly, another measure of protection, the nominal rates of assistance (NRA) to agriculture estimates by Kym Anderson and the World Bank, show that the EU’s NRA fell from 54 per cent in 1991–5 to 11 per cent in 2005–10.

Food Price Volatility and EU Policies

Figure 21.7 Agricultural support in the EU (%PSE and %NRA)

Source: OECD and World Bank.

21.4.2 Reactions to Recent Price Changes

Paradoxically, after the EU had gone through decades of reforms to reduce the CAP’s (negative) impact on global food prices, the world became concerned with high food prices. After the price spikes of 2007–8, it was argued (p.467) that urban consumers were suffering from high food prices but also that rural households were suffering since there was imperfect price transmission of international prices and because many were net food buying households––arguments suspiciously absent from the pre-2008 discussions (Swinnen 2011).5

The timing of the recent food price changes coincided with important discussions in the EU on the future of the CAP. The first increase coincided with the conclusion of the so-called ‘health check’ reforms. The second price spike occurred when a new round of CAP reform discussions had been launched.

A series of policy adjustments were taken, mostly within the existing policy framework. The EC changed some market management measures to increase the supply of food in 2008: intervention stocks were sold, the 10 per cent obligatory set-aside for farmers was suspended, most import duties on cereals were lifted, and milk quotas were increased by 2 per cent.

At the same time the EC confirmed the agenda to stay on course to a more market-based CAP. Reforms further decoupled support and reduced intervention in markets for pig meat, cereals and dairy products. This, according to the EC, aimed to ‘modernize, simplify and streamline the CAP and remove restrictions on farmers, thus helping them to respond better to signals from the market and to face new challenges’ (EC 2008).

In response to the crisis in the dairy sector, where farmers saw their income decreasing with increasing costs (see above), a so-called ‘milk package’ was introduced in 2010. Despite considerable pressure of dairy organizations, the ‘milk package’ did not include measures to directly intervene in the markets. (p.468) Instead the policy initiatives focused on strengthening the position of farmers in the supply chain (by improving contracts between farmers and dairies and strengthening farmers’ collective bargaining power).

The price changes also affected discussions on the longer term CAP framework itself, and the discourse of interest groups and policy makers, however generally without fundamentally altering their proposals. For example, COPA-COGECA (2011), the main EU farmers’ organization, now argues that, despite high prices, farmers are losers because of volatility, high input prices and ‘food chain imbalances’. They––and other interest groups––asked for more regulations, moving away from the long-term liberalization strategy for the CAP. So far, however, the EU has (i) reaffirmed the engagement of the EU towards an open trade policy––also by underlining the harm done by the restrictive export policies implemented by some countries in response to price volatility; and (ii) stayed on course with its reform proposals in specific sectors such as dairy and sugar (phasing out the quota regime), despite a slight change in argumentation, i.e., by also linking the motivation to price volatility.

21.4.3 Negotiations on the Future CAP: A Return to Intervention or Not?

There is uncertainty whether this course will be continued in the future, as the EP, which now enjoys full legislative influence in the CAP reform process (Roederer-Rynning 2003), seems to be leaning towards a more interventionist approach, possibly because interest groups which favour more regulation, such as some of the farmers associations, appear to be more influential in the EP than in the EC.

The 2011 EC proposal on the future CAP proposed to introduce some minor changes in the form of payments but without a return to market interventions. The changes in the payments can be summarized in three key words: convergence, greening and capping: support is to be more equally distributed (convergence), better linked to environmental objectives (greening) and with a maximum ceiling (capping). The proposals use price volatility as a justification to maintain the CAP direct payments (as ‘safety net’) to protect farmers against price volatility: they give ‘basic financial security to farmers, without distorting international markets’ (EC 2011).

The proposal also includes a new ‘crisis reserve fund’ and a ‘crisis management toolkit’ (to respond rapidly to extreme events of price volatility), which include funds for crop and weather insurance, and income stabilization to compensate farmers if their income drops by 30 per cent (EC 2011). Bureau (2012) concludes that various conditionalities such as maximum quantities on intervention, limits on compensation and co-financing requirements make these measures consistent with WTO disciplines and limited in practice.

(p.469) In addition, the EC proposes to allocate a €4.5 billion envelope for research and innovation on food security, the bio-economy and sustainable agriculture but the impact is likely modest since a large share is a reallocation within the EU Budget (Bureau 2012).

There are clear signals that the EP prefers a more interventionist approach and more market regulation. This was evident from the EP’s reactions to the EC proposals on MiFID2, the EC communication on ‘A Better Functioning Food Supply Chain in Europe’, on competition rules in agriculture and in the debate on the end of sugar quotas. The EC has several times confirmed the ending of the sugar quota regime by 2015, arguing that, considering rising demand, maintaining sugar quotas would be completely counterproductive in the context of price volatility. However, key members of the EP have argued that the extension of the sugar quota regime is crucial to stabilize markets at a time of increasing price volatility, a position backed by the major sugar producing countries. Hence, both groups argue that their solution would reduce volatility and improve the competitiveness of the sugar sector (Matthews 2012).

In conclusion, the food price spikes have influenced the debate on the future CAP reform and its outcome is still uncertain. So far the effect has been minimal, mostly affecting arguments, much less the main policies, as the current CAP proposals do not fundamentally alter the trend followed by the EC before 2008. The EC has used price volatility as a justification to move towards more market liberalization in the agricultural sector and reduce intervention mechanisms, and as a justification to maintain existing CAP payments (as ‘safety net’) to protect farmers against price volatility. However, the outcome of the current CAP reform negotiations are still uncertain and the EP, which now has a much larger policy influence in this policy field, appears to favour a return to a more interventionist approach. The amendments on CAP reform, adopted by the EP in 2013, indicate that the EP is indeed trying to reinforce public intervention.

21.5 Political Economy Considerations

From a political economy perspective it is interesting to observe how EU policies have (not) responded to price volatility and the impact of the institutional organization of the decision-making. It is well-known that there are important political incentives for decision makers to adjust policies to changing market conditions. The so-called anti-cyclical policy pattern is well-documented as interest groups turn to governments to assist them when market conditions turn against them (Swinnen 1994; Olper 1998) and there is considerable empirical evidence on this in agri-food markets, both in Europe (p.470) (e.g., Swinnen 2009) and elsewhere (Anderson and Hayami 1986; Anderson, Rausser, and Swinnen 2013). It is therefore logical to expect that policies in the EU, as elsewhere, may have been adjusted in response to the dramatic changes on the world food markets.

First, the lack of major interventions is consistent with the fact that incomes of EU farmers have increased on average over the 2005–11 period (Figure 21.8). They have benefited from higher prices while receiving constant levels of payments from the EU. However, as mentioned earlier, there were major differences among farmers. In particular the dairy sector has seen an income decline. The introduction of the milk package to assist the dairy sector is a response to this.

Food Price Volatility and EU Policies

Figure 21.8 Index of real farm income per annual working unit (2005=100)

Source: EC-DG Agriculture and Rural Development.

Second, compensation for higher food prices to consumers has occurred mostly through increased social spending, not through food market regulations. Several factors play a role here: social spending is a more efficient and more targeted instrument than limiting the price of food, in particular in a large and heterogeneous EU27. This heterogeneity is also reflected in large variations in the share of food in consumer expenditures in the EU27, which should have triggered very different consumer reactions. Social spending is also more efficient because farm prices make up a small share in consumer food prices.

Third, most policy discussions on the CAP in the past years have focused on how to reform the farm payments, as increased pressure from taxpayers and demands from environmental groups challenge the need to continue the type of payments as they currently exist. Farmers’ organizations have concentrated more on lobbying to secure the payments rather than on a major (p.471) shift towards more regulation. They have been supported by landowners who are benefiting from higher land prices with land-based payments (Ciaian, Kancs, and Swinnen 2010).

Fourth, an interesting issue is the different position of the EC and the EP, with the latter taking a more interventionist stance. It is difficult to draw strong conclusions on this since the policy is still debated and the issue has not been resolved yet. Still it appears that the differences can be related to (at least) two factors. The EC has played a leadership role in steering the CAP reforms in the 1990s and 2000s and, as a bureaucracy that had the right to table the policy proposals combined with strong leadership and a strong capacity in analysis and policy preparation, has been able to steer the reforms through the political process, carefully arranging a qualified majority of votes in the European Council, and largely ignoring the EP (Swinnen 2008). Another factor is that the EC is very well aware of the international dimensions, in particular the WTO constraints and ongoing negotiations, since they have been intensely involved in these negotiations where the agricultural commissioner has collaborated with the trade commissioner. It appears that the EC wants to stay on course in moving the CAP towards more market orientation, continuing its 20-year strategy, and legacy.

In contrast, the EP does not have such a legacy as it is just now being involved in the actual decision-making. Moreover, the Agricultural Committee of the EP, where the key positions are prepared, is filled with members who are linked to traditional agricultural interests, such as farmers’ organizations, former ministers of agriculture, etc. (Crombez, Knops, and Swinnen 2013; Roederer-Rynning 2003). This contrasts with the EC’s approach in the past decade to broaden the support base for the CAP by reaching out to environmental groups, consumers, etc. Farmers’ organizations have started to target the EP’s Agricultural Committee as their key area for lobbying activities. However, obviously, also here the WTO agreements do impose real constraints on policy reactions.

Finally, the limited response in important EU policies to price volatility has also to do with the fact that policies such as the CAP and any policy relying on EU budgetary expenditures is regulated within a multi-annual agreement, and can only be changed after long negotiations. Hence, policy reactions from 2007 to now have been constrained by the CAP and budget agreements covering the 2006–13 period.

21.6 Impact of EU Policies on Global Food Prices

As explained in the previous section, the impact of the current CAP on global prices is much smaller than in the past. Several studies show the large impact of EU policies on global food markets during the 1980s (Van Meijl and van (p.472) Tongeren 2002). Recent studies on the price volatility of major food commodities (Anderson and Nelgen 2012; Anderson, Ivanic, and Martin 2012) show that EU policies had little or no impact on volatility in the grain and oil seed market.

Unlike other countries, the EU has neither introduced export constraints for food nor caused a major use of agricultural products for biofuels so far. The new proposal to change the EU biofuel targets may have a significant impact in the future (compared to the situation if this would not be the case).

Increased social policies and development aid may have had some indirect effects by compensating consumers in the EU and in developing countries for higher food prices and thus stimulating more consumption and thus higher prices, but there are no estimates on the impact of these spending increases.

The CAP of the 1970s and 1980s would have had a much stronger effect in countering high food prices than the current CAP as the surplus production and the large food stocks in the EU could have been used to export food (including cereals) and thus to reduce prices when they were rising, both as commercial exports and as food aid. The policy reforms over the past two decades which have reduced the distortionary effects of EU policies on world food markets have also reduced its capacity to quickly increase food exports during price spikes.6 This is illustrated by the fact that EU food aid to developing countries was at its lowest during the past five years, when food prices spiked (see Figure 21.6).

21.7 Conclusions

The period 2007–11 was characterized by high volatility in global food prices. EU producer prices followed a similar trend to global prices, but the size of the changes was much smaller with important differences between agricultural commodities. For example, cereal prices increased much more than dairy prices. Dairy farmers’ income decreased with input feed prices increasing more than output prices.

Food prices for EU consumers have increased only slightly, with real food prices 5 per cent higher in 2012 than in 2005 and very little volatility. Changes of food prices therefore had a limited impact on the average EU households’ welfare, but with significant heterogeneity within the EU. The EU and member states responded to the price volatility by a series of actions to mitigate short- and medium-term effects of the food price shock, to increase agricultural supply and to tackle the global effects of the price rises on the poor. In this study we focused on policies to protect EU consumers, attempts to regulate ‘speculation’ on agricultural commodities, revisions of (p.473) sustainability requirements for biofuels, international development and food aid and changes in the EU’s CAP.

Arguments that increasing volumes of financial investments in commodity derivatives led to speculative behaviour in food markets causing increased price volatility triggered EC initiatives to regulate this. The financial sector argued against ‘over-regulation’ of financial markets while other groups insisted on further regulation to increase transparency and to discourage speculation. A final agreement on a directive has yet to be reached.

The EC proposed large changes in its biofuel strategy when it became clear that biofuel production was an important factor in increased food prices and when arguments and evidence appeared on uncertain environmental benefits because of indirect effects of land use. From encouraging biofuels through binding targets and blending mandates, the EC now seeks to minimize the use of food crop-based biofuels.

Food aid declined over the past two decades due to a shift from food aid towards development aid and because of falling intervention food stocks due to CAP reforms. The EU established a €1 billion ‘food facility’ and supported G20 initiatives to reduce price volatility and to reinforce transparency on agricultural markets.

For decades the CAP depressed global food prices as the EU imposed high tariffs on imports and exported its subsidized food surplus production. A series of reforms led to a policy system that maintains large government support to farmers, while creating less distortion on international markets.

Global price volatility induced a series of relatively minor policy adjustments that could be taken within the existing policy framework. So far the EU has reaffirmed its engagement towards an open trade policy and stayed on course with its reform proposals in specific sectors, despite a change in argumentation, i.e., by linking the motivation to price volatility.

The lack of major interventions is consistent with the fact that incomes of EU farmers have increased on average over the 2005–11 period, except for sectors such as the dairy sector, where the EU has responded by supporting this sector through new initiatives. Farmers’ organizations have concentrated more on lobbying to secure the existing CAP payments rather than on a major shift towards more regulation, as increased pressure from taxpayers and demands from environmental groups challenge the need to continue the type of payments as they currently exist. Farmers have been supported in these political pressures by landowners.

Compensation for consumers has occurred mostly through increased social spending, not through food market regulations. Despite (or because of) the financial and economic crisis, social expenditures by EU member states increased by approximately 7 per cent between 2005 and 2010. Social spending is a more efficient and more targeted instrument than limiting the price (p.474) of food, in particular in a large and heterogeneous EU27 and because farm prices make up a small share in consumer food prices.

There is uncertainty whether this course will be continued in the future, as the EP, which now enjoys full legislative influence in the CAP reform process, seems to be leaning towards a more interventionist approach.

While the EC wants to continue its twenty-year strategy in moving the CAP towards more market orientation and broadening the support base for the CAP by reaching out to environmental groups, consumers, etc., the EP does not have such a legacy as it is just now being involved in the actual decision-making. The Agricultural Committee of the EP is controlled by members with links to more traditional agricultural interests. Discussions on the future of the CAP (for the 2013–20 period) have been on-going since 2009, but the decision-making process is slow because of the institutional framework and because of the simultaneous negotiations on the EU budget. Decisions are likely to be taken in 2013.

The limited response in important EU policies to price volatility has also to do with WTO agreements on agricultural policies which do impose real constraints on policy reactions and the fact that policies such as the CAP (and any policy relying on EU budgetary expenditures) are regulated within a multi-annual agreement. Policy reactions from 2007 to now have been constrained by the CAP and budget agreements covering the 2006–13 period.

Finally, the impact of the current CAP on global prices is much smaller than in the past. Recent studies show that EU policies had no or very little impact on volatility in key food markets. Increased social policies and development aid may have had some indirect effects by compensating consumers in the EU and in developing countries for higher food prices and thus stimulating more consumption and thus higher prices, but there are no estimates on the impact of these spending increases.

Paradoxically, the CAP of the 1970s and 1980s would have had a much stronger effect in countering high food prices than the current CAP. Policy reforms over the past which have reduced the distortionary effects on world food markets have also reduced the EU’s capacity to quickly increase food exports, either as commercial exports or as food aid.

References7

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Notes:

(*) The authors thank Per Pinstrup-Andersen, participants at the Project Meeting ‘The Political Economy of Food Price Policy’, held at Cornell University, and two reviewers for useful comments.

(1) There is also large heterogeneity between member states with respect to the change in consumer prices. In general, the figures on consumer price inflation were higher in the new member states than in the Western European countries (see Swinnen, Knops, and Van Herck 2013).

(2) After the first food price spike, many international observers (e.g., De Schutter 2010; UNCTAD 2011; World Development Movement 2012) argued that increasing volumes of financial investments in commodity derivatives since 2004 and the related increase in speculative behaviour was one of the main factors explaining the food price spikes (for the complete references, see Swinnen, Knops, and Van Herck 2013).

(3) Political economists have explained this growth in protection by the decline in farm incomes compared to rapidly growing incomes in the rest of society as well as declining opposition of consumers and industry with less worker expenditures on food and increased organization of agribusinesses and food companies (Swinnen 2009).

(4) The political economy factors which made these radical reforms possible are discussed in Swinnen (2008). The impact of the GATT/ WTO on the shift towards less distorting policy instruments is shown in Swinnen, Olper, and Vandemoortele (2012).

(5) See Swinnen, Squicciarini, and Vandemoortele (2011) for a political economy explanation.

(6) Note that this should not be interpreted as an argument to reverse the CAP reforms.

(7) For a more complete list of relevant official documents of the European Institutions, see Swinnen, Knops, and Van Herck (2013).