Set-aside in the European Union: success or failure?

by Teresa Acklin
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   Set-aside is currently the target of much criticism in the European Union. Farmers criticize it because it limits their ability to produce food for sale to the market or as aid to the hungry; environmentalists criticize it because it disfigures the landscape; and the non-farming public criticizes it because it is accompanied by payments to farmers for doing nothing, financed by taxpayers.

   With all this unpopularity, what induced the European Commission to propose set-aside and the Council of Ministers and European Parliament to approve it?

   The purpose of set-aside is to stem the rising tide of cereal production in Europe and to eliminate costly intervention (buying-in by the state agencies) and even more costly disposal of the surplus by means of ever-increasing export subsidies.

   The crisis of over-production pains national treasuries and alienates allies. It doesn't even help the undernourished, who can't afford to buy the grain in the first place and whose indigenous agricultures are handicapped by the low prices resulting from the grain dumped on their markets.

   So how did this state of affairs come about?

   Until the early 1980s, the Common Agricultural Policy seemed to work tolerably well, and the relatively small surpluses of cereals could be exported without too great a strain on the budget. But in 1984, there was a bumper crop in the E.C. (as it was then called), and alarm bells rang.

   The E.C.'s first attempt to control production was by squeezing prices. This is the first preference of any government because it requires the least administrative effort. But the natural reaction of any farmer whose prices are squeezed is to increase his output; so this didn't work.

   Then, the E.C. conceived the idea of making producers pay a tax (the so-called co-responsibility levy) if they produced more than a predetermined quantity. This, however — apart from threatening farmers — only scratched the surface of the problem, and the Commission had to come up with a more radical form of supply management. Hence, the MacSharry Reform of the CAP, agreed in May 1992.

   Some analysts thought cereal production quotas were an inevitable solution. Quotas had been introduced in the milk sector, and though initially an administrative nightmare, seemed to control the milk surplus without ruining producers. But the word “quota” is anathema to some interests, so the Commission looked to the American precedent, where acreage reduction has been a feature of agricultural policy since 1933.

   A key element of the 1992 CAP reform is to reduce cereal support prices by 30% over three years, so as to improve the competitiveness of cereals used in animal feed relative to other competing products (especially imported cereals substitutes such as manioc, corn gluten feed, citrus pulp, etc.). Farmers receive compensation by a payment per arable hectare, provided they go into the set-aside scheme by taking a proportion of the arable land (cereals, proteins and oilseeds) out of production. Small farmers producing fewer than 92 tonnes of cereals are exempt, but receive a smaller rate of compensation.

   There are two forms of set-aside, known as rotating and non-rotating (permanent), the rules being published in July 1992. The rotating scheme requires 15% land reduction, and the non-rotating program, to be applied in 1994, requires 20% — except in Demark and the U.K., where the rate is 18%.

   Detailed rules for both schemes provide that there must have been a crop on the land during the previous year; that the land must be in blocks of reasonable size, at least 0.3 hectare; that the land must not be used for alternative enterprises, except for non-food crops; that the land must have been farmed by the same farmer for at least two years; that the land must lie fallow from 15 January to the end of August; and for the rotating scheme, that the land must rotate all around the declared area, so that the land set aside must be somewhere different every year for six years. For the non-rotation scheme, the fixed set-aside must be applied without interruption on fixed parcels of land for a minimum period of 60 consecutive months.

   The rate of compensation to be paid to farmers is calculated on a regional basis, taking into account notional average yields. The figure was first set at Ecu 45 (U.S.$48) per tonne.

   Recent proposals before the Council of Ministers would increase compensation to Ecu 57 per tonne. Taking a notional average regional yield of 6.4 tonnes per hectare, this rate would increase the payout to Ecu 364.8 per hectare from Ecu 288, adding about Ecu 350 million to the E.U. budget.

   Further proposed amendments would reduce the six-year period for rotational set-aside to three years, but at 20%; would apply compensation to land set aside in excess of the obligatory 15%; would permit, under safeguards, the simultaneous use of fixed and rotational set-aside; and would permit transferability of obligations, etc.

   Many doubts have been expressed about the likely success of the set-aside scheme in fulfilling its objectives. Commission officials put a bold face on it, claiming that the first year's harvest and planting estimates already demonstrate success. (Total take-up of set-aside in the different E.U. member states is shown in the accompanying map.)

   Commission officials say that cereals plantings are down by 7%; that this year's harvest, at 164 million tonnes, is already lower than last year's at 166.3 million; but as last year's harvest was drought-affected, a truer comparison is with 1991-92 at 180 million tonnes.

   These views are attacked by some trade groups and analysts, who say set-aside is likely to produce a much smaller crop reduction than the 15% hoped for by the Commission. The reasons the policy is likely to be less successful than in North America are the exemption given to the large numbers of small farmers who will remain outside the scheme and the substantial reserves of under-utilized capacity that will be drawn upon. These reasons, coupled with the expected annual increase in yields, mean that the decline in output is unlikely to exceed 6.5%.

   On past experience, which shows that weather factors in any case are likely to be more influential than any administrative regulations, the critics are more likely to be right than the Commission. To achieve its objectives, and to comply with the “clarified” Blair House Agreement, even officials privately concede that set-aside might have to be raised to 30%. Yet, a promise has been made to the French, to secure acceptance of the Uruguay Round accord, that this would not be done.

   How long taxpayers will see the point in spending Ecu 1.2 billion on a program that is only partly effective is the next point for conjecture.

   By Tom Sewell, a consultant to the international grain trade.