The European crisis, Britain and the CAP

The outcome of the eurozone crisis remains unknown, although none of the measures taken so far have really tackled the fundamental problems of sovereign debt and structural uncompetitiveness in Southern Europe.

What effects will the exercise of the British 'veto' have on attempts to reform the CAP? NFU policy director Martin Haworth is one of the most experienced individuals in agricultural politics and policy and he told Farmers Weekly that only time would tell if Britain would be marginalised in Europe and hence have less influence on a range of issues.

He made a distinction between Britain's largely unsuccessful attempts to secure CAP reform and broader efforts on regulation. He noted, 'The UK has pursued CAP reform policies ... which have pursued UK negotiators on the margins of the debate, so it is unlikely that Mr Cameron's actions will change the way in which the UK is already viewed with regards to CAP.'

'However, on broader regulatory matters where the British voice has been heard in recent years, for example on environmental and market regulation matters, Mr Cameron's actions may affect Britain's influence in the EU.'

The NFU is concerned about a scenario in which agricultural powers were repatriated to the UK, although Eurosceptics have focused mainly on various forms of labour market protection and the Common Fisheries Policy.

A NFU briefing document states that 'A worst-case scenario would see the UK remaining in the single market but regaining autonomy over support arrangements.' The NFU fears 'That would allow the Treasury to achieve its long-standing goal of removing direct payments altogether.'

Supposing Britain left the EU or repatriated CAP payments, the withdrawal of subsidies overnight would cause chaos in agriculture. In principle one might want to see a return to a deficiency payments system which was the more market attuned form of subsidy that existed before Britain joined the EU.

However, in practice, it would be costly to dismantle the existing (albeit rather inefficient) administrative apparatus and replace it with a new one. One would therefore have to pay farmers the SFP on an historic basis, tapering the amount paid over time so that one might start at 90 per cent of the existing payment.

More radically one could compensate farmers for the subsidy by issuing them with interest bearing bonds which could also be sold on the market but that would probably be unacceptable to the parties involved.

Meanwhile British farmers who had opted to be paid in euros have been converting them into pounds on the spot market rather than waiting for a more favourable rate (which, of course, might well not materialise).

It is generally larger farmers who take payments in euros and they usually have some form of relatively sophisticated risk management in place, including hedging.

The crisis has also injected some uncertainty into the market that trades in English Single Farm payment entitlements. If CAP reform is not agreed in time for the 2014 claim, which in my view is more than likely, the purchase of entitlements now would give buyers access to claims for the years of 2012, 2013 and 2014 for little more than the value of one year's SFP.

Leading broker Webb Paton is reported to be doing about 15 deals a day. The existence of such a secondary market might seem to be perverse but, given that we have farm subsidies, it is a 'second best' solution that facilitates their more efficient allocation.Any source