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Mariann Fischer Boel

Member of the European Commission responsible for agriculture and rural development

Food prices in Europe: what the CAP can and can't do

Konrad Adenauer Stiftung
Brussels, 27 January 2009

[Ladies and gentlemen],

First of all, thank you for inviting me to discuss this extremely important topic with you today – changes in prices for food and agricultural goods, and how we should respond to them.

It's a cliché to say that "what goes up must come down".

If I'd been giving this talk a year ago, over breakfast I would have been reading newspaper articles telling me that we had entered a "new era" in terms of farm prices. I would have been reading that the old problem of low prices was a thing of the past. And I would have been reading that biofuel production was about to steal the food from tables around the world.

Well, we've come back to earth with a thump.

In July 2007, skimmed-milk powder was selling for € 3 500 per tonne in the European Union. This month, the average price has been about half of that.

Likewise, in March 2008, a typical price for bread-making soft wheat was € 260 per tonne. This month, it's been about € 135 per tonne.

What has been driving these developments?

Now we see clearly that last year's media storm about biofuels was something of a red herring: and thankfully, that red herring has swum away.

There has been no U-turn in biofuel policy in the European Union, the US or other large production regions, and yet agricultural prices have fallen a long way. So biofuel production was not the main driver of higher prices.

This makes me even more convinced that it's right for the European Union to push ahead with its biofuel policy – for the sake of the environment and for the sake of fuel security. And just to make it clear – biofuels is not an agricultural project! Producing energy crops may be a nice supplement to farming income, but the devotion is to produce food.

But without biofuels it is not possible for renewable energy to make up at least 10 per cent of national transport energy consumption by the year 2020. We need to be clear about that, just as we need to be clear that we want sustainable bio-energy production. The framework for achieving this is set out in the Renewable Energy Directive agreed last December by the Council and the European Parliament.

That Directive contains all sorts of mechanisms to make our biofuel sector sustainable. For example, there are incentives to use waste material in biofuel production. Also, the Commission must report on the effects of biofuel production on agricultural prices and food security – and take action if necessary.

We don't expect that such action will be needed. We still project that we can hit the 10 per cent target by sustainable bio-energy alone.

Now let's get back to what did cause the price increases.

  • It's clear that bad weather struck simultaneously in key production zones around the world.
  • It's clear that demand has been steadily increasing in highly populated developing countries as people eat more meat and dairy products – whereas growth in yields has been slowing down.
  • It's clear that oil price increases added fuel to the fire (so to speak) both by increasing costs and by creating a hike in all commodity prices – including for food.
  • And it's clear that export restrictions made the markets nervous, and so pushed up prices further.

The role of speculation is much discussed, but I am quite sure that expectations helped to drive prices higher and higher. Financial funds bought up agricultural futures contracts like hot cakes when the market was rising, especially because other assets became less interesting, such as stocks and financial products linked to real estate. Maybe there was a bubble, which has now burst, maybe there was not. That we will leave to the historians to find out, but it is a fact that the mood of the market has changed completely and that prices have dropped as fast – or even faster – as they went up.

Where will prices go from here?

We still forecast that, at some point, farm prices will recover and fluctuate around levels below recent peaks but higher than in recent years.

And let's bear in mind that, even at their peaks, in real terms many prices were not high by long-term historical standards.

In any case, that word "fluctuate" is an important one. Prices may be fairly volatile in the years ahead. And of course, policy must respond.

So what should we do?

Let's immediately make a distinction between agricultural prices and food prices.

The shelf price of certain foodstuffs is influenced much less by changes in farm gate prices than by the cost of energy and labour. This is usually true of a loaf of bread, for example – because the agricultural ingredients typically make up about 5 per cent of the cost.

For other foodstuffs, the relationship is closer. But in any case, food prices don't move on exactly the same line as agricultural prices.

For example, as farm gate prices have fallen, food prices have followed them downwards more quickly in the euro zone than in many of the New Member States.

And I can tell you.... When farm prices went up, the muesli that I eat for my breakfast certainly got more expensive. Did it get cheaper when farm prices came down? My purse says no!

There's not much that the Common Agricultural Policy (CAP) can do about this issues like this one – which are really issues of competition.

In a communication published last December, the Commission set out key related topics to be looked at in more detail in the months ahead.

For example, national and European competition authorities need to keep an eye on the consolidation which is taking place in the retail and food-processing sectors – to make sure that this consolidation does not tilt the playing field too far in one direction. As we know, in some Member States the retail sector has the strength of a giant.

The High-Level Group on the Competitiveness of the Agri-Food Industry will make recommendations on competition issues in the next few months.

But let me leave the supermarkets behind and come back to farming. After all, until we make it into the world of Star Trek, if there's no farming, there's no food!

Of one thing I'm confident: if prices are volatile, policy should not be volatile.

We don't want knee-jerk reactions to trends which may or may not last. We want logical, steady policy that will stand up whether there's rain, wind or sunshine in terms of market prices.

This is what we're building.

We're not returning to the days of heavy market management and price support – though some are calling for it.

That approach developed too many drawbacks in its time – for competitiveness, for market balance, for the environment, for trade relationships, and for public perception.

The reforms of recent years have steered the CAP away from these problems and given us a very firm policy foundation.

A vital part of that foundation consists in decoupled income support payments to farmers. Decoupled direct payments leave farmers free to produce what the market is asking for – the right product, in the right quantity, of the right quality, at the right price. This unleashes farmers' spirit of enterprise and also helps the market to balance.

Another part of our policy foundation is other market instruments such as public intervention. Yes, these still have their place, as long as they are tools for use in a crisis – not regular price-setters.

The final element in the foundation is rural development policy.

This helps farmers to raise their competitiveness, and it helps them to find alternative streams of income – for example, by moving into tourism.

Overall, this is a solid foundation – and we're building on it. The most recent important building work has been the CAP Health Check, which Member States agreed last November.

There's a great deal in the final Health Check package. And much of this is relevant to the issue of volatile prices.

First, the Health Check will give farmers even greater freedom to respond quickly to price movements.

We will achieve this by more decoupling, and by loosening or abolishing certain constraints on production – mainly, raising milk quotas and doing away with obligatory set-aside.

Secondly, we're fine-tuning market instruments like public intervention so that they really do act as a safety net.

Thirdly, we're helping to equip farmers to deal with possible disruptions to production. We're transferring extra funding to our rural development policy, to be spent on certain defined priorities. Among these priorities are fighting and adapting to climate change, and managing water better.

Member States will also be able to take funding out of farmers' direct payments and spend it on crop insurance, or on mutual funds for dealing with animal and plant disease.

But food security and food prices are a global "story", not just a European one. The CAP can do a great deal to bring security and stability within the European Union. And it can make a big contribution at the global level.

But a global concern needs a global answer. And that means three things.

First, it means giving financial help to farmers in poorer countries, so that (for example) they can get access to much-needed seed and fertiliser for a quick boost to production.

This is the aim behind the so-called "food facility" which was agreed last December. The facility will make € 1 billion available in addition to other European spending on development.

Secondly, a global approach means investing in agricultural research, technology and knowledge, not only in the European Union but also in developing countries. In the years ahead, the global community must move agricultural research up its list of priorities.

Thirdly, a global approach means building the right multilateral trade framework. Trade opportunities can stimulate agricultural production in poorer countries – under the right conditions.

This is why the European Union is still working its muscles so hard in the Doha Round – to get a deal which will encourage helpful global trade, but also allow poorer countries to open their markets more slowly.

It's true that expectations for the Doha Round have gone up and down like a yo-yo, but we can't afford to give up.

In conclusion: is it really true that "what goes up must come down?"

I seem to remember that this is the first line in a pop song from the 1960s. Rather worryingly, the next line was: "Spinning wheel, gotta go round"!

Are price movements going to make us feel as if we were on a fairground wheel over the next few years?

If so, the CAP won't bring the wheel to a halt. But it will give us a good safety harness.

Thank you.

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