The Battle in Brussels for the future of Irish Agriculture

There is no doubt, however, that farmers get the rough end of the stick from the EMS. Our farm prices are fixed in central European figures, and do not fluctuate so long as we are steady in the EMS.

John Cahalan says: "The farm trade is unable to take advantage of the rising sterling or dollar because of the theory that the community deciides what the prices should be in Ireeland and then imposes taxes on exxports to make sure we don't get more."

It means that although the pound may have depreciated against, for exxample, the £ sterling, we do not get the advantage that our industrial exxporters do. No one seems to have quantified the losses involved, though they could approach. £100 million. No other member state has run into the problem on the scale we have.

The theory that we may, in due course, go for a small devaluation has strong non-agricultural arguments going for it as well. Our EMS rate is fixed against a "basket of currencies". Until now the five re-alignments in the system involved some of our partners moving up and others moving down. So the "basket" stayed around the same value and our rate against it has been stable. But that may be about to change.

One technical expert in the EEC commission put it this way: "The French and the Belgian currencies are still under pressure, and if they deevalue now it would lower the value of the basket, and thus raise the official rate of the Irish £ against it. "That would put the Irish pound in with the Deutschmark and the Dutch Gilder as the only currencies to have revalued in the system. There are arguments 'for and against correcting that and they are fairly evenly balanced. But you can fairly say there is something absurd about leaving a currency like the punt in that situation." •

Irish agriculture is in the trough of a deep depression. This depression has not been caused only by the slowwdown in world economic activity in recent years, but has its roots in a number of factors peculiar to agriculture, not only in Ireland but in the EEC as a whole.

This depression, which started in 1979, is all the more acutely felt because it follows a boom period which began at the end of the 1970's and continued, with the occasional sectoral hiccup, until 1978. The boom owed much to the conditions created by EEC membership, and it is widely felt that the depression is due partly to the fact that the expected continuation of the EEC benefits did not materialise. .

Confidence in farming is a very volatile quantity. When things are going well, the sky is the limit for development and expansion. This is an inevitable component of the classsic cycles in many lines of production, particularly pig production and cattle production. If profit margins are good, prices of young pigs and young cattle are bid up rapidly by fatteners. Sooner or later, they reach the point where profit margins at the final stage are so reduced that activity falls off. Demand for young animals falls off, returns to breeders fall, they reduce production and turn to other enterprises, and the whole cycle begins again when low prices for young animals make fattening profitable again.

The classic cyclical pattern is made more complex by the inter-relationship between different lines of production - e.g. between milk production and beef production.iand by the variety of outlets available for some products, as for example in the case of cattle where slaughtering plants compete for supplies with Livestock exporters.

When the cyclical pattern of production is superimposed on a background of rapid inflation, it can result in a kind of desperation, and a widespread view that there is almost nowhere left to go.

EEC membership brought about a profound change in the economic conditions of agricultural production, and in the income expectations of Irish farmers. It opened up prospects of what seemed like almost unlimited markets at price levels never before realized for most products. This contrasted sharply with· pre-EEC trading conditions in which we produced mainly for the UK market, at "world" market prices, in competition with suppliers from all over. the world.

The EEC market support system offered price guaranntees at relatively high levels, and an intervention system involving public (EEC) purchasing of our main products if the market did not produce a price equal to the guaranteed level. It also offered subsidies to cover the difference beetween guaranteed price levels and world market price levels for products exported outside the EEC.

The period 1970-1978 covers the boom years, from the time when the expectation of EEC membership began to influence farmers' confidence in the future, to the time when accelerating inflation and the cost-price squeeze combined to undermine confidence.

Over that period, the gross volume of agricultural outtput (including the value of changes in livestock numbers) increased by 35.5%, an average annual increase of just under 3.9%. The volume of net output (i.e. gross output less feed, seed and fertilizers) grew by 30.3% over the period, an average annual increase of just under 3.4%. The volume of the main farm inputs used over the period increased by 50%, an annual rate of 5.2%.

Compared to the trends in previous years, this was a very respectable performance, particularly in terms of the growth in the volume of gross output, where performance had traditionally been fairly sluggish. It was, of course, notable that the volume of the main inputs used grew faster than the volume of gross output. While on the face of it this might be taken to indicate a drop in productivity, the general view was that this was an inevitable result of a gradual shift towards a more intensive pattern of producction, and of a trend towards the concentration of growth on the more intensively-managed farms.

The period 1970-1978 was one of very rapid increases in farm incomes. Total farm income went from £181.1 million in 1970 to £834.5 million in 1978 - an increase over the period of 361 % or an average increase of 21 % per annum in money terms. Adjusted for inflation, the real increase over the period was 71.3%, or an annual average increase of almost 7%. That was the global figure: the average increase in real income per head of the popuulation working in agriculture was higher, since the number of people working on farms declined over the period.

Over the period 1970-1978, agricultural prices inncreased rapidly. By 1978, livestock prices were 3.8 times as high as they had been in 1970, prices of livestock products (including milk) had quadrupled, crop prices had tripled. The rate of price increase for farm output far outstripped the rate of increase in input prices, so that margins inncreased substantially. At production level, this created a climate favourable to expansion.

The effect on farm living standards was dramatic. Large sections of the farming community discovered for the first time what the consumer society really was, and a substanntial part of the income gains went into improving family living-standards on farms.

One of the results of the favourable income and price developments of the period was the creation of an expecctation that margins and real incomes would continue to increase iii. much the same way as seemed 1'0 happen as a matter of course in others sections of Irish society.

Confidence in farming created a climate of confidence in the food processing industry, and in other downstream and upstream agriculture-related industries.

In the main processing industries, in the beef and dairy sectors, it seemed that a continuing increase in supplies of raw materials could be built into plans for the future. That factor, in addition to the confidence generated by EEC market support mechanisms and the availability of both national and EEC funds for modernization and expansion, ensured a substantial development in processsing capacity and increases in employment. This was parrticularly the case in the beef processing industry, where a number of new firms began operations and processing capacity was updated and expanded.

The pound sterling proved to be fairly weak over the period 1973-1978, and this created some problems in the context of the system used for fixing farm prices. In order to set common prices, it was necessary to define a "unit of account" with a fixed value in relation to each of the Memmber States' currencies. This fixed value was called the "green rate" of each currency. As long as currency exxchange rates on international markets did not diverge from the "green rates", the system worked without complicaations. Devaluations and revaluations, however, caused probblems. In the interests of stability, it was decided that "green rates" should not automatically change with market rate adjustments.

As long as "green rates" were not adjusted, it was necesssary to compensate for the difference by the introduction of a system of compensatory border levies and subsidies, called monetary compensation amounts (MCA's). For a Member State with a depreciating currency, MCA's operate as levies on exports and subsidies on imports; for a Memmber State with an appreciating currency, they operate as subsidies on exports and levies on imports.

The system continues in operation to this day, and has always been a point of contention during the annual farm price fixing negotiations.

Given the effective weakness of sterling and the punt's one-for-one relationship with it until March 1979, it was frequently the case during the 1973-1978 period that the "green rate" fixed for the punt was higher than the market exchange rate.

It was clear from mid-1973 that an adjustment of the Irish "green rate" to bring it into line with the market exxchange rate would facilitate our export trade, and increase the value of EEC price guarantees and aids expressed in punts.

Thus, right through the period, the two successive Governments followed a policy of adjusting the "green rate" as rapidly as possible. This gave further impetus to the rise in prices following the application of the EEC systems in this country

Things began to go wrong in 1979, and all the trends, which had up to then been so positive, turned round. The average annual growth in volume of gross output in the period 1978-81 fell to just under 1.5%. The volume of inputs, however, rose at the same average annual rate (5.2%) as in the period 1970-78. Input prices rose in 1978-81 at an average annual rate of almost 14%, against an average annual increase of 7% in output prices. These factors put very severe pressure on incomes. From a total of £834.5 million in 1978, total farm family income fell to £7J4 million in 1979, £672 million in 1980 and £787 million in 1981.

The net result was that, in real terms, total farm income was 42% lower in 1981 than in 1978. The sluggishness of gross output was the result of a number of factors.

In the cattle sector, 1980 saw a massive wave of deestocking, as producers sold off stock to try to generate cash flow in the face of declining margins.

In the milk sector, output of milk for manufacturing fell in both 1980 and 1981.

The volume of inputs purchased continued to rise, parttly as a result of efforts to intensify production and partly to compensate for the effects of two difficult growing seassons in succession.

On the output prices front, the period 1978-81 saw the adoption of first a "prudent" price policy and then a "rigoorous" price policy by the EEC Commission. This meant that the Commission's annual proposals - the startinggpoint of the negotiations - were pitched at a lower level than had normally been the case up to then. This more restrictive approach to EEC pricing policy coincided with a resurgence of inflationary pressure at home, to produce a severe cost-price squeeze, and acute pressure on farm living standards.

In March 1979, the European Monetary System was set up. Ireland joined, the UK did not. The central rate fIxed' for the punt at that time proved to be stable and sustainnable. By then, the "green rate" for the punt had been brought more or less into line with the central rate. Apart from minor adjustments resulting from re-alignments of other currencies, there was no further room to supplement annual common price increases at EEC level by devaluaations of the "green rate", apart from a 3.8% change which was added to the prices agreement for 1981/82, and which resulted from a re-alignment of the lira and an adjustment for sterling. Thus, the common price increases fixed at EEC level became, apart from exceptional market circummstances, the only source of price increase available. Inevittably, EEC price increases were influenced heavily by the fact that inflation rates in other Member States were runnning at much lower levels than ours.

One of the reasons underlying the fairly restrictive appproach to EEC farm prices in recent years has been the worry, shared by the EEC Commission and some Member States, that the Community's financing arrangements might not be able to bear a higher level of expenditure on the Common Agricultural Policy.

The main source of finance for the Community is a 1 % slice of the VAT now levied in all Member States. So far, the Community has not in any year used up the total amount of funds which could be made available in this way. The decision on each year's Community budget speciifies the percentage to be taken. The maximum limit now specified, however, cannot exceed 1 % unless a new deciision is taken and ratified by the Parliaments of the Memmber States.

For the last two years, there have been fears that the Community might run out of "headroom" in budgetary terms, and find itself unable to meet its commitments.

Added to this, there has been the continuing dispute about the UK's net contribution to the Community buddget. Since 1979, the UK has applied considerable pressure to its EEC partners in an effort to get agreement on a reduction in its net contribution. Whatever the merits of the UK case - and they are doubtful in a number of resspects - the tactics used (including, on two occasions, the blockage of decisions on farm prices) have led to a fundaamental re-examination of the Community's budget struccture.

In May 1980, the Council of Ministers drew up a "Manndate" to resolve the problem by means of structural channges in the Community's budget. The terms of the Mandate given to the Commission were as follows: " ... the examinaation will concern the development of Community policies, without calling into question the common financial ressponsibility for these policies which are financed from the Community's own resources, or the basic principles of the Common Agricultural Policy. Taking account of the situaations and interests of all Member States, this examination will aim to prevent the recurrence of unacceptable situaations for any of them."

This expression of the problem attempted to mean all things to all Member States, and of course allowed each one to claim that its own particular problems and requirements . were covered, no matter how much they might have been in conflict with those of other Member States.

The UK position was quite straightforward from the beginning : more money back for the UK and development of policies from which the UK could benefit.

Other Member States had different requirements. A number took the view that if refunds were to be made to the UK, their share of the cost of these should be kept as low as possible. There was some interest in developing new policies, notably by France. A number of Member States wanted to ensure that the re-examination of policies would not lead to any requirement for an increase in the Commuunity's overall resources. The problem could be expressed, in crude terms, as being one of finding a way of making a substantial refund to the UK and developing new policies without allocating any extra funds to the Community budget. Inevitably, attention was concentrated on the CAP as being the largest single possible source of funds for the operation.

The CAP, which now accounts for some 62% of total Community expenditure (as against 75% only two years ago) is the bete noire of a number of Member States.

Since 1973, there have been a number of re-appraisals of the CAP - variously termed "stocktaking" or "reflecctions". On each occasion, strenuous efforts have been made to secure fundamental changes in support mechanisms; these have been vigorously opposed, notably by Ireland, France and Denmark, Member States which would regard themselves as being threatened by any fundamental changes.

The result on each occasion has amounted to limited trimming around the edges of various policy mechanisms.

In addition to that, a number of decisions were made in the last two years which resulted in reductions in the cost of a number of market support mechanisms, particularly in the area of export refunds on dairy products. These deciisions were motivated partly by a concern to reduce someewhat the political profile of some areas of expenditure : since they could be justified on economic grounds, they were not too painful.

The Commission produced its report on the "Mandate" in June 1981. That report suggested a number of "guideelines" for the CAP, which centred around the idea that production targets should be set for the principal farm products, and that if production exceeded the target levels, the price guarantees should be reduced in. respect of the excess quantities.

The publication of the Commission's report set off a chain of complex manoeuvres, the aim of which was to ensure the passage of the basic ideas put forward. The Council Presidency, taken over by the UK in July, wanted to keep the substantive discussion in the Foreign Affairs Council, where the bargaining would be purely political and aimed at securing agreement at the November meeting of the European Council (Heads of State or Government), and away from the "specialist" Councils, such as the Council of Agriculture Ministers. A special "Mandate Group", composed mainly of the Member States' permannent representatives in Brussels, was set up to prepare the ground for the Foreign Ministers, who in turn were to preepare the ground for the European Council. Provision was made for "orientation debates" by specialist Councils, inncluding the Agriculture Council.

The formula for the "orientation debates" was in line with the overall Presidency strategy - Ministers would simply expound their views on the proposals, and the Presidency would inform the "Mandate Group" of the general line of the views expressed.

This, of course, was completely unsatisfactory from the Irish point of view, since it was aimed at avoiding substanntive discussion of agricultural issues by the Ministers with direct responsibility. For a time, however, it looked as if the manoeuvre might succeed, since the French and the Danes who, with Luxembourg and Belgium should norrmally tend to follow a line similar to Ireland's, seemed to be prepared to go along with the Presidency.

A great deal of persistence and lobbying by the Irish side was required in the early Autumn to ensure that a substantive discussion would be held by the Agriculture Council, and the Commission was brought to agree to produce a specific report on the agricultural aspects of the Mandate.

The Irish side decided that the agricultural aspects should be kept to the fore during the discussions, and that as much attention as possible should be concentrated on clarifying the budgetary figures involved, so as to illusstrate the practical effects of proposals which the Presiidency wanted to deal with at a purely political level. The importance of the agricultural aspects was underlined by the fact that the Minister for Agriculture attended all of the discussions held by the Foreign Ministers - a practice which was followed on a number of occasions by the French also.

It quickly became clear that the discussions on the Mandate would have a very substantial influence on the farm price proposals for 1982/83. This posed something of a dilemma for the Irish and, to some extent, for the French, since there was a danger that specific demands put forward in the context of special measures to accompany the 1981/82 price proposals might be regarded as the price of agreement on some of the less acceptable proposals in the Mandate discussion. Thus, it was necessary to connduct two sets of negotiations separately but simultaneously.

There was the added complication that while, on the one hand, the Commission and some Member States were opennly trying to get agreement on reductions in CAP expendi-. ture, the Irish requirement in terms of special measures. required an increase in CAP expenditure in Ireland. At the same time, Italy and Greece were playing for a substantial increase in CAP expenditure in Mediterranean regions, whatever happened to the overall total.

In view of all of these factors, discussions with the Commission on specific, immediate Irish problems were held in October and November, and concentrated on explaining the situation in detail and assessing the Commisssion's view as to what it might be able to propose. On the whole, the reaction was fairly negative, with much emphasis being placed on the view that the high domestic inflation rate was the main cause of difficulty, and that it had to be dealt with domestically. On the Irish side, the accent was put on the fact that the proposals being put forward in the Mandate discussion would have the effect of closing off any line of action which would help to get agricultural expansion going again.

The European Council in November failed to agree on specific guidelines, and the brief was handed back to the Foreign Ministers. At this point, the brief was still in very considerable disarray, even though the Presidency tried to present a picture of some agreement.

This cleared the way for suggestions for specific meassures for Ireland in the context of the prices package, since lack of agreement on the Mandate left the field still fairly open in relation to prices. Indeed, the Irish approach up to then had been aimed at avoiding any binding agreement in advance of discussions on the farm prices.

Specific proposals were put forward in December. A deliberate decision was made to concentrate on a limited number of measures, since previous experience had shown that if a long list were put forward, the Commission's reacction would normally be to pick up the least important. The three specific proposals were for
- a calf subsidy, financed by the Community
- continuation for four years of a special heifer subsidy (already agreed for one year) with the addition of Community finance.
- extension of the area covered by the Disadvanntaged Areas Directive, and a reclassification of some of the existing areas.

The Commission's initial reaction was negative to all three, but since then has become more positive, to the point where the calf subsidy has now been included in compromise proposals.

On the Mandate front, Irish pressure brought some other Member States along to the point where, in January, both the French and the Danes came to support the line that no decisions could be made until the budgetary implications were clarified and the figures clearly stated. This represen- I ted a considerable advance from the Irish point of view, since only a clear expression of the figures would allow Member States to see the implications of the purely poliitical decisions which had been sought up to then. •