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MEMO/08/421

Brussels, 19 June 2008

Commission's / EU's response to the high oil and food prices

Oil prices

What are the structural factors behind the rising oil prices?

Global energy supplies have recently failed to keep pace with constantly rising global demand for energy.

The driving forces of global demand are mainly found in Asia's emerging economies (China and India). Demand is also rising fast also in many producing countries themselves (Middle East), sometimes helped by internal subsidies on fuels (Indonesia, India, Iran) shielding the local population from the impact of global price increases and thus not allowing consumption patterns to adjust.

On the supply side, future availability of oil will be determined by new exploration and production. Given the time lag in this investment-intensive industry, availability of oil for the global market several years into the future is being decided by moves taken now. New exploration and development of new production capacities have been lagging behind expected demand growth. The IEA has recently warned of the possibility of an oil crunch as early as 2012.

Structural imbalances also exist in the downstream parts of the global oil sector. The global refinery capacity of about 4, 255 bt has not increased in recent years. Refining bottlenecks have global consequences, making demand and supply patterns in the global economy more intertwined, complex and thus less predictable.

Why is there not enough investment to bring oil onto the market?

The reasons for lagging investments are multiple. First, with most easily accessible reserves being already in production, and sometimes already in decline, finding and producing new oil reservoirs becomes increasingly costly and technically demanding. This puts a natural constraint on new developments. Furthermore, a commodities boom affecting amongst others steel prices has pushed the cost of the investments up making some of the upstream projects more expensive.

In addition, a number of producing countries have started to nationalise their oil industries, a tendency generally not favouring new investments in the oil industry's upstream activities, which is however badly needed[1]. Badly needed new investment decisions are sometimes also held back by geopolitical uncertainties affecting major sources of oil (e.g. Iran, Iraq).

Another disincentive for upstream investments has been high mineral extraction tax rates or export tariffs in many producing countries. The Russian government started to address the issue and increased the tax-free threshold for mineral extraction tax from USD 9 to USD 15.. The opportunity that rising prices offer for increased taxation has to be balanced with the need for new investment. Finally, an important structural impediment lies in the limited availability of engineering skills in recent years at global level. National and international oil companies, have difficulties in satisfying their demand for new work-force, further hindering their investments.

What are the temporary factors fuelling prices to rise further?

Overall expectations of generally growing oil prices have been recently exacerbated by short-term developments. The geopolitical situation persistently makes full production in some areas of the world impossible, difficult or at least intermittent.

Furthermore, the global oil market is part of the overall commodities business which in general has been seeing upward price trends. Oil is a global commodity and one for which the global market is huge in volume and diversified in available and sophisticated financial instruments.

This results in an active presence in the global oil market of institutional investors not directly concerned with oil. Most recently the Sub Prime Loans crisis inspired a search for alternative investments, further increasing demand for oil contracts. This tends to increase the risk of sharp swings in market sentiment.

Are the oil prices rising because of speculation?

Rising oil prices are largely the result of major structural shifts in the global economy. We are moving away from the era of cheap and easily available oil and this trend is inevitable and generally/globally applicable. Some analysts (including e.g. OPEC's) predict prices up to $200/bbl by the year's end,).

The market is driven largely by expectations, and specifically expectations of future further tightening of supply-demand. After a year-long period of backwardation in the oil futures market (contracts on oil for nearby delivery more expensive than those for delivery further forward) we seem to be returning to a contango market (contracts on oil for delivery further in the future are more expensive than those for delivery closer to the date).

What role do biofuels play in the current situation?

Biofuels can help to lessen the pressure on the transport sector by offering an alternative to oil. According to the OECD, biofuels accounted for 1.8% of total transport fuel consumption in 2007. Biofuels are estimated to have met about a third of the increased demand for transport fuel in 2007.

Biofuels need to meet strict sustainability standards. As far as biofuel consumption in the EU is concerned, such standards form part of the Commission's recent proposal for a Renewable Energy Directive. The Commission intends to use them as the basis to encourage biofuel producers and consumers worldwide to adopt a similar approach. The fact that the EU biofuels target is also conditional on the commercial availability of second generation biofuels will also help to limit the risk that biofuels uses up land that could be used to increase food production.

How is the rising oil price affecting price of other fuels?

Long term gas contracts negotiated in the wholesale markets are indexed to a certain extent on heating fuels (and ultimately on crude). Decoupling of oil and gas price mechanisms is therefore an option of avoiding spill over effects from one market into another. The decoupling has some potential of reducing market volatility. On the other hand, because of the fact that much of the gas consumed in Europe is transported by pipelines, it is unclear how the price for piped gas would evolve in case the indexation formulae were no longer used.

Coal prices remain at the record levels having followed the rising oil and gas prices, even if they continue to evolve in line with the particular conditions of the international coal market and not only as by-products of oil.

What is the impact of increasing prices on transport costs?

Transport services play a central role in modern society and economy and in the EU account for about 4.3% of all value added. But the real importance of transport goes further beyond this figure as transport allows the division of labour and supports and interconnects markets. But as things stand, there is no transport without oil as it depends almost totally on oil products (97%)[2].

Transport is also the sector where oil price rises become immediately visible. Oil price rises are then relayed to the rest of the economy mostly through the transport modes which are most energy intensive: first of all road transport (83% of total transport energy consumption comprising both passengers and freight) and aviation (14%). Transport costs are a relatively small part of the cost structure of industry and may range from 1% to 10% of final product value. For instance transport costs amount to 5-10% of production costs for processed food, 1-3% in the textile sector or slightly under 4% for automotive.

Thus if transport costs increase by 30% for sectors such as navigation not subject to excises, this could mean for the automotive industry an increase of 1.2% in the total cost of production and for processed food an increase of up to 3%. In the case these products were transported by road, due to the fixed character of the excises the increase would be slightly over half of that.

Households spend 13.6% of their total final consumption in transport and half of this amount (6.70%) corresponds to the operation of personal transport equipment, which means mostly fuel costs. A doubling of crude oil prices in this sector subject to excises for about 30% of pump prices and where energy costs represent about 25%-30% of transport costs would imply an increase of almost 20% in the cost of transport which could amount to over 1.3% of final consumption of households.

What the European Commission will do to encourage producers to bring more oil onto the market?

The Commission needs to promote dialogue with key producers like Russia, Norway and the OPEC. Commissioner Piebalgs will represent the Commission at the important meeting at Jeddah on June 22. In the framework of these dialogues, our work should continue to open new opportunities for investment and production development as well as help markets become more efficient and transparent on both supply and demand sides.

How should the public authorities react to current trends?

Rising oil prices are largely the result of major structural shifts in the global economy. We are moving away from the era of cheap and easily available oil and this trend is inevitable and generally/globally applicable.

This calls for a clear distinction between short term measures to alleviate the hardship on vulnerable sectors of society, and longer term measures to accompany and promote the transition to a low carbon economy.

Governments in consumer countries, and increasingly in producer countries, have little influence on prices in global oil markets in the short term. Political pressure from citizens and companies therefore focuses on the tax component of the price they pay "at the pump", or subsidies to help the needy to afford energy at a time of rising prices. A balance is needed to ensure that targeted, time-limited support to the vulnerable does not send the signal to suppliers that taxpayers are prepared to absorb price rises, rather than pass these on to the consumer.

In any event, the EU has agreed to reduce oil dependency by stimulating the development of a low-carbon economy where the EU is less vulnerable to price variations.

What can governments do to alleviate the pain for those most vulnerable?

National governments can adopt measures to alleviate the burden for. There are a range of measures which Member States can take which fall within national competence, linked to both taxation and social security. Countries like Belgium and the United Kingdom already make targeted payments to help those most in need.

At their recent meeting, ECOFIN ministers stressed that such measures should remain short-term and targeted at those sections of population most in need of help, to alleviate distress as well as to encourage energy saving – on the basis of the 'Manchester agreement' of September 2005 when the world was confronted with an equally sharp increase in oil prices. Their concern was to avoid sending the wrong signal to consumers and to the oil-producing countries: the signal that it does not matter how much prices increase because we will continue consuming the same levels of energy, rather than stressing the need to consume less oil and gas to force prices down and reduce our dependency on fossil fuels and imported energy.

Will growing energy prices affect the Commission's Energy Policy goals?

The impact that high oil prices and our growing dependency on foreign oil imports have on the competitiveness of the European economy has been one of the drivers for the European Energy Policy: curbing demand through more efficient technologies and the promotion of renewable energies can compensate for the decline in our indigenous oil production (dropping from 133 million tons in 2005 to about 50 million tons in 2020).

The EU should therefore vigorously pursue its Energy Policy targets, namely reducing its energy consumption by 20% compared with a business as usual development through an aggressive programme of energy efficiency measures, ETS and in increasing the share of renewables in our final energy consumption to 20% by 2020.

In this context, and given the dependence of the transport sector on petroleum products, the Commission proposals for a 10% share of renewable energy (including biofuels) in transport have an especially important part to play. Considerations of biofuels' sustainability reinforce in turn the importance of the development of more advanced "second-generation" biofuels. EU has already in place instruments to encourage and support such development efforts.

Should the Commission investigate the level of competition in the oil sector?

The EU also needs to monitor the competitive situation in the markets for petroleum, including the sectors involved in the processing, production and sale of oil and petroleum products. It is ever more important at the times of high and rising prices to make sure that consumers are treated fairly. The Commission is therefore continuously monitoring the situation on these markets and examines any complaints received. A special study on competitiveness is being prepared to further map and clarify the level of competition in the sector.

Are any special actions envisaged in the transport sector?

The Commission strategy to fight climate change in transport and reduce at the same time its dependency from oil comprises a wide variety of measures which go from the vehicle level, towards, equipment, modal choice and policies to influence transport decision makers, i.e., the citizens and firms as a whole.

Those measures are in the pipeline or being implemented. The discussion by the Institutions and the implementation by Member States and industry need to be taken forward:

Thus in the transport sector, the Commission intends to promote energy savings through improving vehicle technologies (engines, fuels, tyres, etc.) and favouring more energy-efficient transport solutions (shift to rail and waterways, better logistics and navigation, smart charging).

How can energy efficiency be improved for vehicles and fuels?

Energy efficiency gains, such as those that have already taken place in aviation and in respect of the private car are the ideal solution as they allow reductions in both internal and external costs. However, some energy efficiency gains have long lead times as they require investments and research upstream.

To improve the efficiency of the cars, which are the biggest oil consumers, the Commission has proposed the tightening up standards on CO2 emissions from cars and fuel. The EU has set ambitious objectives of limiting to 120 grams the CO2 emissions per kilometre for passenger cars by 2012. The Commission has also proposed that fuel suppliers reduce greenhouse gas emissions from fuel across its life-cycle by 10% by 2020 and it will also propose reducing the CO2 emissions from new vans by the end of 2008. The Commission is also preparing a proposal on tyre labelling which is likely to cover at least car and van tyres and include a system to grade tyres according to their rolling resistance, while satisfying safety standards; it will be proposed in autumn 2008.

The swift implementation of the Strategic European energy technology plan with the creation of European Industrial Initiatives with industries will allow to develop new systems of green propulsion, in particular in the field of alternative fuels, hydrogen, on-board computer systems and of aviation "Clean Skies".

What is the role of speculation in the current price increases?

Although financial markets have recently become more active in the commodities markets, and this may make prices more volatile, there is no conclusive evidence of a speculative impact on prices, as stocks are stable around normal level and there are currently no signs of high inventories or hoarding. Other factors can explain the ongoing price rises, in particular the strong increase in demand from emerging economies, including the oil-producing countries themselves, which has not been matched by an increase in supply. Given very low elasticity of supply and demand to price changes in the short run, small disturbances can lead to sharp fluctuations in prices. The Commission will continue to monitor closely developments in commodity-related financial markets.

Can the Commission's climate change and energy policies help in times of high oil prices?

Yes, the high oil prices make the case for the climate and renewable energy package even stronger. The package will bring important economic benefits in the short and long term. If the greenhouse gas and renewables targets are met, oil and gas imports will fall by some 0.3% of GDP, which translates into import savings of €50 billion by 2020. These savings are based on a conservative estimate of an oil price of around $60 per barrel. If the oil prices remain at the current even higher level, these benefits will also be considerably higher.

Overall, reducing greenhouse gas emissions and increasing renewable energy in line with the targets agreed by the Heads of State will make the EU considerably less dependent on imports of oil and gas. As well as bringing positive trade balances, this will reduce the EU's exposure to rising and volatile energy prices, inflation, geopolitical risks and the risks inherent to supply chains that fail to match the global demand for growth.

Aren't the EU targets of reducing emissions by 20 per cent in 2020 too ambitious?

The EU's climate policy is aimed at avoiding dangerous climate change and limiting global warming to 2 degrees Celcius compared to pre-industrial levels. This is what science tells us is required in order to avoid a drastic increase in negative effects from global warming. We need to get started on this reduction path in the next 10 years or so. First in developed countries and later also in other countries, including large emitters in the developing world, such as China and India. That's why it is so important that we get an international agreement in Copenhagen 2009 that sets the rules for long-term action. So the targets are an essential step. 

There is much at stake, with the prosperity of the European economy reliant on finding the right way forward. There is compelling evidence now available that the costs of inaction would be crippling for the world economy: 5%-20% of global GDP, according to the Stern Report. Minimising the overall costs of the package has been a key principle in the design of the package of proposals. The impact assessment shows that these costs can be kept to under 0.5% of GDP a year by 2020. Therefore, also from an economic perspective, the targets cannot be regarded as too ambitious.

Why has the fishing sector been hit so hard by the rise in fuel costs?

The underlying cause of the crisis in the fishing sector is the combination of depleted stocks which have been overexploited for many decades, and overcapacity in the fleet which fishes them. The result is a vicious circle, in which chronic low profitability drives even greater fishing pressure at a time when stocks need to rest and recover.

In this context, the rise in the price for Marine Fuel (which has gone beyond 0.7€/l in most European harbours, an increase of around 240% since 2004) adds to the pressure on a sector already under great strain – in particular because with marine fuel untaxed, the proportion of the price facing a rise is higher than for most consumers. .

What short-term support is available from the EU?

The European Commission has agreed in principle on the contents of an emergency package which should presented to the Council of Fisheries Ministers in Luxembourg on 24 June. The Commission plans to adopt a formal proposal on this subject early in July. The goals is to put in place measures which provide swift help, but also encourage the trend to restructuring which is the only viable future for the industry.

The main measures will consist of temporary derogations to the rules of the European Fisheries Fund so as to support faster adaptation of the EU fleet to the present situation and provide temporary relief during the transitional phase. The Commission believes it is vital to focus aid on the fleets which are most dependent on fuel, and thus most affected by the current overcapacity. Therefore, key measures will include Fleet Adaptation Schemes to provide more, and more flexible, decommissioning aid for fleets that accept substantial restructuring, aid to encourage switching to more energy-efficient and environmentally-friendly fishing methods, emergency aid for temporary cessation of activities, and market measures to increase the value of fish.

Possible modifications to the de minimis regime for fisheries are also being considered, so that the ceiling of EUR 30,000 per three years would be applied per vessel, rather than per firm (though with an overall cap of EUR 100,000 per firm).

A number of specific initiatives to promote the value of fish at the first point of sale are also envisaged, and the Commission is planning to set aside an additional EUR 20-25 million from the CFP budget to fund ad hoc projects in this area, in addition to the funds available under the EFF.

Further measures are planned to encourage the shift to energy-saving technologies, cushion the socio-economic impact of the crisis, and facilitate the reprogramming and disbursement of EFF funds.

FOOD PRICES

Why have food prices risen?

There is no simple explanation. Many factors are in play. Recent increases followed a three-decade long trend of declining agricultural prices, with both food prices and the share of food in household expenditure at historically low levels. Even now, cereal prices are half what they were in 1975, in real terms. Among structural drivers of higher food prices has been a steady rise in demand for both staple and higher value-added foods, particularly in large emerging economies – such as China and India - and a general growth in world population. Rising energy costs are having a marked effect on food prices, particularly by increasing the cost of inputs like nitrogen fertilisers, for which the cost has risen 350 percent since 1999, and through increased transport costs. The growth in crop yields has slowed down and new outlets for agricultural products have emerged. Temporary contributing factors include poor harvests in a number of regions of the world, a historically low level of stocks, the depreciation of the US dollar, and export restrictions in a number of traditional suppliers to the world market. Speculation may also have amplified the underlying price volatility.

Are biofuels to blame for the price increases?

No, biofuel production is not the driving force here. The European Union currently uses less than 1 per cent of its cereal production to make ethanol. This is a drop in the ocean. It uses two-thirds of its rapeseed crop to make biodiesel, but in fact European rapeseed production accounts for about 2 per cent of global oilseed demand. So this is not something to shake the markets. The effect of the US biofuel programme is somewhat greater, if still limited. It is notable that some sectors where biofuels have no impact, such as rice, have seen some of the most dramatic price rises.

Should the EU rethink its biofuels target?

In 2007, the European Council fixed the target for biofuels for transport, and in January 2008 the Commission made its proposals to implement it. The target has never been to reach 10 percent biofuels at any price, but under strict conditions. Those conditions include a workable sustainability scheme, and commercial viability for second generation biofuels. This EU sustainability scheme is currently under discussion at the Council and the European Parliament. It will be the first of its kind in the world. It will need to ensure that production will not have damaging side-effects and has to be robust and enforceable. With or without the Union's 10 percent target, there will be a further increase in the worldwide production of biofuels. Europe can best make a contribution by doing everything possible to show that a sustainability scheme can work and to ensure a rapid transition to the new generation of biofuels. In the transport sector today, the only alternative to non-sustainable fossil fuel is biofuel. Excluding biofuels from the mix would add heavily to the price of meeting the EU targets on greenhouse gas reductions and renewables.

Will the biofuels policy drive up food prices in future?

The EU is sensitive to the risk that competition for land between biofuels production and food production will raise the risk of food shortages and higher prices. That is one reason why the European Council made the target for biofuels conditional on a robust sustainability scheme, and on the development of second generation biofuels. Second generation biofuels do not use the same raw materials as food and hence do not ‘compete’ with food production.

The proposed sustainability criteria cover greenhouse gas impacts, biodiversity and land use impacts. The scheme will also include regular monitoring and reporting on a wide range of economic, social and environmental impacts, including positive and negative impacts on food security. The proposed scheme will apply to both EU produced and imported biofuels. By encouraging the adoption of similar sustainability criteria by consumers and producers of biofuels outside the EU and by actively promoting the global development of second and third generation biofuels, the EU can make an important contribution to shaping the future development of biofuels away from a risk to food production.

What has the EU done to mitigate the pressure for higher food prices?

The Commission reacted immediately last year to rising prices. We removed the obligation to set aside 10 percent of arable land for the 2008 harvest, increased milk quotas by 2 percent and suspended import duties on cereals. The reformed CAP allows our farmers to base their production decisions on what the market is telling them rather than on where they get the biggest subsidy. That is because subsidies are no longer linked to production. The Health Check of the CAP will remove remaining restrictions on farmers and allow them to react to growing demand. It will abolish set-aside forever, significantly reduce the role of market intervention, and phase out milk quotas gradually between now and 2015. Almost all remaining production-linked subsidies will be got rid of, so that farmers have complete freedom to produce what the market requires.

What can be done at the retail level?

In November 2007, we announced a market monitoring initiative under the single market review and this was endorsed by the Spring European Council. It aims to allow the Commission, in cooperation with Member States, to take an economic approach to ensuring the single market delivers full benefits for consumers, growth and jobs. This means taking a sectoral approach to identifying possible obstacles which may be preventing markets from working well. Market monitoring under the single market aims to analyse barriers to market integration, market access, technological development and innovation. The retail sector is one of those covered. The Commission aims to report on results early in 2009.

How can the EU help farmers in developing countries?

The Commission will soon propose a special emergency facility to help agricultural productivity in developing countries. This will use unspent resources from the agricultural budget to stimulate home-grown production in developing countries. But there are a series of other measures already under way:

Research and knowledge transfer

By strengthening agricultural research to enhance sustainable productivity growth of agriculture through new crop varieties and improved cropping systems with higher and more stable yields, more efficient use of water, greater resistance to diseases and environmental stress and less need for pesticides. This will be done through the 7th Research Framework Programme and through our strong support for the international agricultural research system (in particular the Consultative Group on International Agricultural Research, CGIAR), currently standing at around €32.5 million. We hope to reach an average of €63 million per year for the next three years.

An open trade policy

By continuing to promote an open trade policy and working towards an early conclusion of the Doha Round in the World Trade Organisation. There are significant potential gains for developing countries from the Doha Round in terms of new market opportunities, which would help generate additional export income, stimulate agricultural production and facilitate access to foodstuffs, thereby alleviating the current food price hikes. The EU has already autonomously granted duty and quota free access to the 50 least developed countries. The same approach is now being extended to the ACP countries in the framework of the Economic Partnership Agreements (EPAs).

Humanitarian assistance

Major international organisations (WFP, FAO, World Bank, IMF) are warning that a humanitarian crisis could be looming, caused not by a global lack of food but by a deterioration in the access to food for the world's most vulnerable people. The impact of rising food prices on food-aid deliveries has only been partially cushioned by increasing levels of donor resources. The WFP has called for approximately $750 million in additional financing to help maintain food aid for its planned humanitarian and development caseloads in 2008, which has only been partly met. Other UN agencies, Red Cross agencies and NGOs are similarly affected by increases in operational costs. The gap between available resources and increasingly expensive operations looks set to grow. In 2008, the Commission has so far mobilised €333 million for short term assistance. The Commission will carefully monitor the evolution of needs for humanitarian aid, and is considering ways to mobilise additional funds to contribute in international organisations' ongoing or planned initiatives; and to meet possible unforeseen humanitarian needs from 2008 to 2010.

Development policy to support medium and longer term structural responses

In the longer term, a supply response in developing countries can only come through strengthening policies and investments in rural development, food security and agriculture. EU development cooperation programmes will support this approach. Rural development, agriculture and/or food security have been already selected by an increasing number of African countries (22) as focal sectors for support under the 10th European Development Fund (2008-2013). Community support in this area should reach some €3.5 billion over the next five years. Development cooperation responses could proceed along two lines: first, supporting safety nets, including direct social protection (cash) transfers for the poor (urban and rural) to enable them to cope with shocks and lasting high prices; and second, making agriculture a higher priority within development programmes, with measures to promote productivity increases among producers, especially small farmers. Expansion of investments in agricultural research programmes is also key to raising agricultural productivity and to achieving food security in the medium to long term.

Should we embrace GMOs to boost food production?

The use of GMO crops can increase productivity. This may be particularly important in regions of the world which suffer from difficult climatic conditions. GMOs can therefore play an important role in mitigating the effects of the food ‘crisis’. However, the potential benefits of GMOs in this respect do not lessen the need to apply strict scientific scrutiny to the use of GMO technology.

Why have prices risen more in some eastern European Member States?

Because of the relatively high share of agricultural raw commodity value in final product value in certain new Member States, retail prices have risen more sharply than in the EU as a whole. This probably results from the fact that fewer goods and services are added to the raw agricultural product throughout the food supply chain. Hence, recent agricultural market price increases have led to higher consumer price increases in countries like Bulgaria, Lithuania and Estonia than in other EU Member States. Sharper retail price increases in certain Member States are partly because starting levels are comparatively low.

Do EU export subsidies destroy African farming?

Absolutely not. 15 years ago, we spent €10 billion a year on export subsidies. This year, it will be well below €1 billion and will fall to a maximum of €350 million next year. Only 10 percent of agricultural export subsidies go to ACP countries. Contrary to recent media reports, the EU does not subsidise any exports of either chicken or tomatoes to Africa. Subsidised pork exports to Africa are marginal. The main destinations are the Mediterranean Basin and the rest of Europe. We have pledged to phase out export subsidies entirely by 2013. They are yesterday's policy. In any case, thanks to our reforms and recent developments in commodity markets, they are less and less needed as our prices are now aligned with world market prices. Until recently, this sort of criticism may have been justified. But export subsidies are on the way out.

What does the EU do for developing country farmers?

Under the “Everything But Arms” initiative, the 50 Least Developed Countries all have complete quota and tariff-free access to the EU market for all products except weapons. This advantage is now being extended to all ACP countries – 98 percent of goods from ACP countries enter the EU duty and quota free. The EU is the largest market for LDC agricultural exports. 176 developing countries benefit from EU preferences under the “General System of Preferences”, 15 of which benefit from GSP+. The EU provides more trade development assistance than the rest of the world put together. Every year since 2001, the EU has given about €750 million in trade development assistance. The EU takes 85 percent of Africa’s agricultural exports and 45 percent of those from Latin America. It imports more agricultural products from developing countries than the US, Australia, Japan, Canada and New Zealand put together.

What is the medium and long-term prognosis for food prices?

The recent increases in farm prices follow three decades of decline in real terms. Some agricultural prices are already starting to fall from the peaks we saw in early 2008. Compared to these peaks, prices in the European Union have come down by 25 per cent for wheat and 35 per cent for butter. Our analysis suggests that prices will stabilise below the peaks of the past few months but above the historically low levels of recent years. The best cure for high prices is the stimulus to increased production given by the opportunity for higher returns. Many parts of the world have huge production potential, particularly if yields return to normal after two poor harvests. About 21 million hectares of land used for cereals dropped out of use when the Soviet Union split up. The FAO tells us that Russia could potentially increase its grain yields by 45 per cent, Kazakhstan by 60 per cent and Ukraine by 70 per cent. And the average grain yield in the developing world is less than half of "Western" levels.

Are rising food prices only bad news?

Not necessarily. In the medium to long term, rising prices offer new income-generating opportunities for developing country farmers and could enhance the contribution of agriculture to economic growth. High agricultural prices provide incentives for public and private investments and programmes to improve productivity, reinforce infrastructure, spread production to marginal land and enhance the efficiency of agricultural markets. This could have positive effects across the whole economy, increasing labour demand and wages in rural areas, stopping outmigration to urban areas, reducing poverty, and contributing to food security. However, in several countries, some forms of government intervention reduce incentives to producers to invest and increase their production. Additional factors are the geographical location of markets, their organisation, lack of information, the power of some intermediaries in the agri-food chain, difficulties in access to seed, fertilisers, and credit, as well as the low level of investment in rural infrastructure in the past.

How can we help the poorest people in Europe?

The Commission will in September present a revised food security programme for the most deprived persons. The existing most deprived persons' food aid programme, started in 1987, has provided annually around €300 million worth of food aid, reaching 13 million beneficiaries in 19 Member States. It was previously based on stocks of surplus food in EU intervention stores. These are now empty, so a new way of providing this aid will be needed. The goal will be to increase support; to ensure it is targeted on the most needy; and to ensure that the right mix of commodities are covered.

What is the current situation at EU level with regard to taxation of food?

Besides alcohol beverages which are also subject to excise duties harmonised at EU level, VAT is the only harmonised tax on foodstuff at EU level.

Food being considered as a good of primary necessity, a reduced VAT rate not below 5 % may be applied by Member States.

Is the Commission using EU antitrust rules to tackle high food prices?

The global nature of the recent price increases suggests that they are not linked to breaches of the EU’s competition rules.

There has been no particular increase in market concentration in the retail sector, and it seems quite unlikely that cartels have suddenly sprung up in so many countries at so many levels of the supply chain: the Commission has not seen any evidence showing violations of EC Treaty rules on restrictive business practices and/or abuse of dominant market position (Articles 81 and 82).

Competitive markets are the best guarantee consumers have that food prices will be kept as low as possible whilst ensuring the greatest possible choice. OECD figures show that food price increases have been lower than inflation for the last 20 years. Over the same period, changes in the retail market have not led to a loss in diversity of products, cultural heritage or retail outlets.

It is of course important to consider all relevant factors affecting these markets, and the Commission will continue to monitor consumer prices, retail market concentration and any allegations of anti-competitive conduct.


[1] For example, Russia's overall production has recently started to decline as existing fields come to maturity and new reserves are not being explored and/or prepared for production at necessary rates.

[2] The transport sector is the biggest user of oil products (53% of oil for all uses, 72% of oil as a fuel).


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