The EU Council of Agriculture Ministers from the 27 member states met in Luxembourg this week to debate issues related to the “health check” on the EU’s Common Agricultural Policy (CAP). The current policy was put in place in 2003 and runs through 2013, but in May of this year the Commissioner of Agriculture on the European Commission, Mariann Fischer Boel, proposed a mid-course review to make adjustments and prepare for possible policy changes in 2013. Final action is expected by mid-November. The outcome of the health check remains uncertain and could have a significant impact on trade.

Dairy policy is one example of the challenges for mid-course changes. The individual countries in the EU operate under quotas on milk production that are now scheduled to be eliminated in 2015. As part of the health check Commissioner Boel recommended that the quotas be increased one percent per year from 2010 through 2014 to allow the industry to make adjustments in countries that believe they can compete in world markets in 2015. Given record high export prices and expanded trade flows for milk products over the last two years that seemed like a reasonable policy for the world’s largest milk producer. Export product prices are now under pressure and will likely remain so as the worldwide financial turmoil affects consumer demand.

Countries within the EU have responded to the milk quota increase proposal based on their internal market conditions. Germany has faced weak market prices and opposes an increase in quotas. Ireland and Italy see the quota increases as an opportunity and have suggested that the quota increases be front loaded so they can “progressively increase production.” Other countries want help for small producers in mountainous regions by using funds earmarked for rural development. In early October the Agriculture Committee of the European Parliament voted for a one percent increase per year in quotas for only the first two years with a review in 2010 and to allow member countries to temporarily increase quotas if other members have unused quotas. They also called for the creation of a milk fund to help restructure the industry.

Policy setting in the EU is a complex process. The European Commission with 27 members, one from each member country, is the executive branch of the EU. It initiated the CAP health check under Commissioner Fischer Boel. The Commission obviously has an EU wide view of agriculture that recognizes the need for EU farmers to be competitive in world markets within the commitments made by the EU to the World Trade Organization. The Commission also struggles with budget issues and the prospects that agriculture will get a smaller budget after 2013.
The Council of Agriculture Ministers represents the varied interest of the 27 countries of the EU. When discussing agricultural policy, the Council of Agriculture Ministers serves as the Council of the European Union, the decision making institution in the EU. The European Parliament influences policy actions through hearings and votes. The European Parliament will have more power if the Lisbon Treaty to redefine the governance of the EU is approved which would place the Parliament as co-decision makers on farm policy with the Council.

The final part of the mix is the Presidency of the Council of the European Union. That position is rotated every six months among the 27 member countries with the head of state of the country serving as President of the Council. The Presidency for the last half of 2008 is held by the President of France, Nicholas Sarkozy, and the Agriculture Minister of France, Michel Barnier, serves as the head of the EU Council of Agriculture Ministers. Sarkozy and Barnier will serve as the negotiators of the final agreement. France is the largest recipient of funds under the current CAP programs and is much less interested in changing the CAP than Commissioner Fischer Boel. Minister Barnier has said that he will work with the Agriculture Committee of the European Parliament as if the Lisbon Treaty had been passed.

The Agriculture Committee of the European Parliament and the Council of Agriculture Ministers are much less enthusiastic than the Commission about preparing for changes in 2013. That should not be surprising given that the Agriculture Committee members come mostly from rural areas in the EU and the Agriculture Ministers from the member states are tied closely to agricultural interests in their respective countries. These groups are more interested in maintaining the link between production and payments by limiting the shift in some farm payments to rural development programs and retaining the intervention system or management instruments for livestock, grains and dairy.

Long-time follower of the CAP Allan Buckwell of the United Kingdom believes that the 1990s policy consensus of reducing distortions in commodity markets that culminated in the CAP reforms of 2003 has been replace with
retrenchment throughout Europe. Strategic thinking that led to incremental reforms for 40 years is now gone.

If the health check changes next month are similar to those now being discussed, the EU will likely have more internal debates on domestic farm policy and the rest of the world will watch with unease. The EU has made great strides in reducing market distortions over the last 20 years, but much work is left undone. The production potential in the member states from Eastern Europe that recently joined adds to the policy and budget challenges. These are not favorable economic times for moving forward on further policy reforms, but not moving forward will make policy adjustments even more difficult when a new CAP policy and funding level are debated beginning in 2011 or 2012.