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Eurostep Dossier on CAP & Coherence

Draft - Coherence in EU Policies towards Developing Countries

1. Summary and Conclusions

On the eve of the new millennium the Common Agricultural Policy (CAP) of the European Union is again under reform. All over Europe farmers have been protesting. But while their protests make headlines in the European media, hardly anyone in Europe pays attention to the detrimental side effects the CAP-system has on producers outside the European Union.

Yet on the world’s agricultural markets there is a silent trade war going on. The principal victims are poor farmers in developing countries, men and women, who see their local market flooded by cheap EU products. Backed by taxpayer’s money and building on their huge protected home market, EU agribusiness is able to sell European produce on local markets all over the world at prices below cost price. Brussels provides more than 40 billion Euro annually to EU agriculture. As a result, about every agricultural product the EU’s exporters have on offer is directly or indirectly subsidised: from Dutch powder milk and butter to Italian tomato concentrate and pasta. From French wheat, sugar and sunflower oil to Irish beef or German pork. Even the sugar in British marmalade or the sugar and milk in Belgium chocolates qualifies for export subsidies when sold outside of the EU.

In particular the small and increasingly open markets of many developing countries are often flooded by these subsidised exports. While poor urban consumers may welcome cheap EU products, long term development of the whole economy is hampered. Investments in further processing of local farm products are often not profitable under these circumstances. Even existing small and medium sized local industries are sometimes thrown out of business, when import controls are lifted in the process of liberalisation.

Potentially the agricultural sector, employing well over half of the population, is a main engine for development in many poorer countries. But when exporting products to the protected EU market is hardly possible, when on other foreign markets the EU (and sometimes also the USA) is an unfair competitor, and when even on your own home market the EU takes over, realising that potential is difficult.

In their work with local organisations in developing countries, Eurostep members are confronted with the adverse effects of some of the EU’s policies. In this dossier we highlight evidence on the way in which the spill over from the CAP-regime continues to disrupt growth and opportunities in developing country agriculture, undermining the livelihoods of millions of people. The main examples:

• In West Africa, a flood of cheap (mainly) Italian tomato concentrate undermines local tomato processing. While Brussels provides an annual 372 million Euro in processing subsidies to the Southern European firms, the long existing local processing industry in West Africa is in crisis. In Senegal one of the two tomato canning factories closed down two years ago; the increase in imports from the EU was one of the main reasons. The other Senegalese factory has turned to importing cheap triple concentrate in bulk from Italy, in order to can this into double concentrate, which they sell on the local market. Thousands of local farmers lost a market outlet for their tomatoes through this shift in corporate policy, which has also happened in Burkina Faso and Mali. Ghana has seen an enormous increase in imports of EU tomato concentrate recently. Local fresh tomato producers have a hard time. The government’s efforts to sell a closed down tomato-processing factory to an interested foreign investor (Heinz) may well fail because of the unfavourable situation for tomato processing in the country.

• In Jamaica and Brazil, organisations of milk farmers and milk processors have been protesting in recent months against cheap dairy imports, most of which are from the EU. Brussels provides annually some 1.75 billion Euro’s in export subsidies to European dairy exporters, helping them to maintain their nearly 50% share of the world market. Jamaica has a well-established dairy sector, but as a result of import liberalisation local products are now being replaced by cheaper foreign imports. Jamaican farmers are reported to be dumping the fresh milk from their full coolers in the ditch, while EU products, subsidised to the tune of 1 Euro per kilo of whole milk powder, are taking over their market. On the huge Brazilian market, fierce competition between local products, products from neighbouring Mercosur countries and the subsidised imports from the EU is driving down profitability for the hundred thousands of Brazilians involved in milk production. The EU exports some 225 million kilos of milk equivalents to Brazil; using more than 30 million Euro in export subsidies annually.

• There are indications that efforts in several African countries to set up a dairy industry with the support of development co-operation funds are actually undermined by the abundant supply of subsidised EU milk products. In Tanzania, projects like the Tanga Dairy Development Programme supported by Dutch Development Co-operation for over 20 years, have only made very slow progress in marketing locally produced milk products to the urban consumer in Dar Es Salaam. There are several constraints, but clearly the availability of low-priced powdered milk products from the EU (including the Netherlands) and from Switzerland (donated as food aid) is a main factor. While Dutch Development Co-operation invests some 200,000 Euro per year in the Tanga scheme, Brussels provides 600,000 Euro as export subsidies on European dairy products to Tanzania. Is that a coherent European policy?

• Subsidised EU beef exports disrupted regional cattle trade in West Africa at the beginning of the nineties, undermining the livelihoods of hundred thousands of cattle farmers in the Sahel. However in 1993-94, subsidies to the region were reduced after NGO protest in Europe, including a campaign led by Eurostep. This coincided with a sharp devaluation of the CFA and EU exports to West Africa dropped significantly. But then EU dumping of the same beef products appeared to be shifting towards South Africa, that had just opened its post-apartheid borders. Not only South-African farmers, but also cattle farmers in neighbouring countries -- Namibia in particular-- suffered from the increased imports. The government of South Africa and farmers’ organisations of both countries protested in Brussels. Again EU beef export subsidies were reduced in 1997-1998 and EU-beef exports to South Africa now seem to be back to more normal levels. But with the rouble crisis in Russia and the reduced EU beef consumption in the wake of the mad cow disease, EU-beef stocks have increased to nearly half a million tonnes. Part of it is now donated to Russia as "food aid". Where will the rest be dumped this time, one wonders?

• As a result of drastic import liberalisation, farmers in Eastern and Central Europe seem to be facing similar problems with subsidised EU-exports as their colleagues in many other developing countries. Last year farmers in Poland were out on the streets to protest against low prices and cheap imports, in particular from the EU. Poland, the Czech Republic and Hungary were flooded in 1998 by surplus pig meat from the EU. In order to restore internal prices and to get rid of surpluses, the European Commission had increased export refunds on Central Europe to 400 Euro per tonne (almost 50% of the value). Yet this was at a time when these countries had practically lost their own traditional export market for pig meat in Russia, due to the rouble crisis. Only after strong protest from the Czech government did the Commission agree in November 1998 to again reduce export refunds to Central Europe. But in order to "help" Russia in its economic crisis, export subsidies on pig meat to Russia were drastically increased. This can hardly be called consistent with the EU SAPARD program, which aims to prepare the Central and Eastern European countries for accession to the EU.

• While the European fruit and vegetable canning industry continues to benefit from huge processing and export subsidies, South Africa has cancelled its export subsidies system when it liberalised trade after apartheid. Because of this change and stiff competition with the EU on third markets, one of the Langeberg canning factories in South Africa was closed down in 1997. Some 400 permanent and 2000 seasonal workers, mostly women, lost their job.

In this dossier Eurostep argues that the forthcoming Agenda 2000 reforms will only marginally reduce these detrimental side effects of the CAP. Despite a gradual shift from guaranteed prices to direct income support to farmers, export subsidies and processing subsidies will remain abundantly available to back up the marketing of EU products outside the Union. Production quotas for milk (already in large supply!) are to be increased. Products like tomato concentrate, sugar and canned fruits are not covered by the reforms. The continued high level of overall support guarantees EU agriculture a leading position on the world market.

Eurostep sees the disruptive side effects of the CAP as blatant cases of the lack of coherence in EU policies towards developing countries. In article 130 of the Amsterdam Treaty and in article C of the Union Treaty, the EU has explicitly committed itself to ensuring policy coherence between its development co-operation efforts and other policies, which are likely to affect developing countries. The EU Development Council has for years asked for action by the Commission, but apart from one or two occasional interventions, (as around beef dumping in West Africa), little was done.

In June 1997 the Development Council adopted a resolution, specifying key issues and suggesting practical procedures to improve policy coherence. "Ensuring that agricultural

exports and food aid in kind do not damage the production capacity and marketing of developing countries" was identified as a key issue by the Council. Almost two years later, however, the Development Council is still waiting for the first progress report of the Commission on how they are implementing these and other long standing issues. Even the reform proposals of Agenda 2000 have not been assessed in view of their effects on developing countries’ agriculture. Nevertheless, coming WTO negotiations make an assessment of CAP and Agenda 2000 more and more urgent.

In conclusion, Eurostep calls on the European Council and the new European Commission to start acting on these issues now.

1. Immediate action to ensure that the CAP no longer damages the production capacity and marketing of developing countries, including the countries in transition in Eastern and Central Europe:

• The Commission should make an overall coherence impact assessment of the current CAP-regime and the forthcoming Agenda 2000 reforms. Such assessment should lead to clear recommendations on how to fine-tune and change current proposals in order to minimise their negative impact on agriculture in developing countries, and provide a basis for the EU WTO negotiation mandate.
• Phasing out export subsidies to countries who are developing their own production capacity and limiting processing support to production levels covering internal EU consumption, should be a policy priority.
• A special joint Council meeting of Development Co-operation and Agriculture should be held to discuss the outcome of the impact assessment and propose appropriate decisions, also in view of the forthcoming WTO negotiations.
• The Commission should set up a surveillance and monitoring mechanism for all exports of CAP-products that are likely to affect production in developing countries. Immediate investigations and consultations (with governments, private sector and civil society organisations) should start on the cases concerning processed tomatoes, dairy and meat mentioned above.

2. Implementation of the June 1997 Coherence Resolution on the broader issues of Coherence of EU policies:

• The Commission should produce regular, yearly, progress reports, covering at a minimum issues like Agriculture, Fisheries, Migration and Conflict Prevention & Arms Trade.
• They should make impact assessments on all relevant new legislation.
• The Commission should investigate the use of joint monitoring procedures with developing countries for prompt identification of possible incohererence.
• Addressing cases of policy incoherence may need the organisation of joint Councils and Expert Meetings.

3. Create within the Commission the capacity and the competence to systematically address policy coherence issues:

• Set up a special Coherence Office, headed by an Ombudsman.
• This office should have the task to (i) investigate complaints from governments and civil society organisations concerning adverse impact of EU policies in developing countries; (ii) advice the Council and the Commission on actions to be taken to address issues of incoherence; (iii) make coherence impact assessments of new legislative proposals; (iv) prepare and present annual reports on progress in addressing issues of incoherence.

Eurostep has produced this paper as a contribution to the EU’s policies on coherence in relation to development co-operation. The perspectives set out in this paper are drawn from the experiences gained in development by Eurostep’s member organisations through their involvement in development programmes in Africa, Asia and Latin America. It builds on the positions and proposals that have been put forward in previous positions and briefing papers published by Eurostep. This paper has been developed by Novib .

The membership of Eurostep includes:

ActionAid, UK; CNCD, Belgium; CONCERN Worldwide, Ireland; Deutsche Welthungerhilfe, Germany; Forum Syd, Sweden; Frères des hommes, France; Helinas, Greece; Hivos, Netherlands; Ibis, Denmark; Intermón, Spain; Kepa, Finland; Mani Tese, Italy; Mellemfolkeligt Samvirke, Denmark; Movimondo, Italy; NCOS, Belgium; Norwegian People’s Aid, Norway; Novib, Netherlands; Oikos, Portugal; Oxfam GB; Oxfam Ireland; Swiss Coalition of Development Organisations, Switzerland; terre des hommes, Germany; terre des hommes, France.

2. Coherence in EU policies towards developing countries

"Does Europe want to help us with development aid or do they want to ruin us with subsidised exports?" Cattle farmer Seydou Madiene, Burkina Faso.

Is there consistency in EU-policies towards the developing countries? That question has officially been on the agenda of the EU since the signing of the Maastricht Treaty. Clearly, the relation between developing countries and the EU is not limited to the area of development co-operation. Developing countries can also be confronted with other aspects of EU: the Communities’ External Trade policy, its Common Agricultural Policy (CAP), its Common Fisheries Policy, its Common Foreign and Security Policy. In addition, there is a whole range of internal community policies which can all have important side effects on weak countries outside of the EU: standardisation and harmonisation, environmental policies, financial integration.

In an ideal situation all the different EU-policies would be mutually reinforcing the goals and efforts of the EU development co-operation. However, reality is that such ‘synergy’ rarely occurs. At best overall policies are ‘neutral’ to the goals of development co-operation. And in several areas EU policies actually work contrary to the declared developmental goals. This can even go to the extreme situation that projects supported by DG-8 from the EU development budget are directly undermined by actions from, say, DG-6, the section of the European Commission responsible for the Common Agricultural Policy.

This concern has led the drafters of the Maastricht Treaty to include a coherence article in the section on Development Co-operation (This article was retained in the new Treaty on the European Union of Amsterdam). In article 130-U of the Treaty the objectives of development co-operation are formulated as:

1. "the sustainable economic and social development of the developing countries";
2. "their "smooth and gradual integration into the world economy"; and
3. "the campaign against poverty".

Article 130-V then states that "The Community shall take account of [these] objectives in the policies that it implements which are likely to affect developing countries".

This article 130-V has laid a solid legal foundation for a thorough political debate and subsequent action on any EU policy that negatively affects poor countries and people outside the Community. However, such a debate has not taken any real shape yet. The European Parliament and some member states have repeatedly called for action by the Commission. Both Marin and Pinheiro, the previous commissioners responsible for Development Co-operation, have been asked at many Development Council meetings to start work on the issue and to present reports and proposals. But by and large nothing has been done. It seems that many officials in Brussels and politicians in many European capitals fear the coherence debate may be a Pandora’s Box. Opening it might bring out a multitude of very difficult and sensitive political debates on core elements of EU policies.

It seems that mainly because of NGO actions some specific cases of incoherence have been put on the European political agenda over the last years. Together with their Southern counterparts, European NGOs like the Eurostep network, Solagral, ERO, Christian Aid and Saferworld set up campaigns on issues like:

• dumping of EU beef in West and South Africa;
• subsidised over-fishing by European vessels in African coastal waters, in particular in Senegal;
• unrestricted arms exports by member states of the European Union.

By referring to the Amsterdam Treaty coherence article, the NGOs could increase the political relevance and impact of their advocacy work. Some specific results were achieved, after the campaigns had gained public and political support in several member states:

• After reducing beef export subsidies to West Africa first in June 1993, the Commission adopted in May 1994 a special internal guideline on the issue. In this guideline the Commission concluded that it was "necessary to take immediate measures to end the lack of coherence between the Community’s agricultural policy and its development policy" and decided "as a matter of principle, to adjust the restitutions on beef exported to West Africa to avoid a negative impact on production and projects in the region". When in 1997 the EU management committee for the beef sector also reduced export subsidies on beef to South Africa, they motivated that step by referring to coherence objectives.
• While far from perfect, the new 4 year Fisheries Agreement with Senegal that the EU signed in May 1997 included important improvements compared with the previous one: far less EU based vessels were given access to the 12 mile zone, leaving much more space to the local artisanal fisheries communities in Senegal.
• A European Code of Conduct on Arms Exports was agreed in June 1998. While far from sufficient, this code has increased control on member states’ arms exports to developing countries.

While the case-by-case approach adopted by the NGOs may have produced some first results, systematic inconsistencies between development policies and other fields of policy continue to exist. Official systematic targeting of (potential) incoherence in EU policies remains of vital importance to achieve progress.

The special coherence resolution agreed in June 1997 could provide some of the basic elements for such an approach, if applied properly. In that resolution, the Council agreed on a number of procedural arrangements and priority themes. The four themes mentioned are conflict prevention, food security, fisheries and migration. One of the key objectives the Council identified under food security was to ensure "that agricultural exports and food aid in kind do not damage the production capacity and marketing of developing countries". In terms of procedures the Council called on the Commission to introduce "coherence impact assessments" and to present regular (preferably yearly) a report on coherence related issues. They invited the Commission to experiment with the use of joint monitoring procedures with developing countries and proposed joint Council meetings and consultations between experts on special issues.

Apart from the production of a progress report, now in preparation for the May 1999 Development Council meeting, the Commission has not implemented the resolution. Eurostep finds this unacceptable and calls on the Council to demand urgent and adequate implementation. Ongoing cases of incoherence, as outlined in this dossier on the Common Agricultural Policy, illustrate the need for action.

The appointment of a new European Commission presents a major opportunity to end the EU’s lack of initiative so far.

3. CAP, CAP reform and developing countries

In the early sixties the European Economic Community established its Common Agricultural Policy (CAP). The system was meant to raise productivity, thus securing food availability and raising agricultural incomes.

For the most important products it was decided to guarantee minimum prices, which would generally be higher than world market prices. Maintenance of high price levels involved protection of the internal market against cheap imports. Produced surpluses could only be sold by means of export subsidies.

The system proved to be successful. Within a short period the EU transformed itself from net importer to net exporter for most products. But soon after that, the success of the CAP ran out of hand. Surpluses increased, and led to enormous stockpiles and increasing costs for export and stocking. In the early eighties, the CAP budget amounted to 11 billion Euro. In 1997 costs of agricultural support had skyrocketed to over 40 billion Euro.

European farmers, and notably the large producers, have reaped the fruits of the system. Farmers outside the EU, however, have increasingly been facing detrimental effects of the European agricultural policy:

• EU surpluses led to increased supply on world markets, resulting in low export prices for third countries.
• High use of export subsidies has reduced world market prices even further, thus barring other producers from the world market and discouraging development of agricultural production in many developing countries.
• Targeted export refunds have distorted local markets, disrupting local production chains.
• Not only export subsidies on CAP regulated primary products, but also compensation schemes for processed products (meant to compensate processors for high costs of raw materials ) have led to the export of cheap products, which severely frustrated processing industry in third countries and/or the farmers producing concerned raw materials.
• Due to import tariffs and other import barriers, access to the large and rich European market has been extremely difficult for most agricultural products.

Developing countries have been extremely vulnerable for these external effects. For most developing countries, agriculture is the backbone of the economy. Agricultural production does not only play a role in securing food availibility, but is also extremely important for employment and poverty reduction. In 1996 value added by agriculture was 34% of GDP in the low income countries,while labor force in agriculture was 69% of total labor force in these countries (as compared to respectively 5.3% and 1.7% in the EU).

3.1 CAP reforms in the past

Over the last years, a number of internal policy changes and external developments have led to changes in the EU agricultural policy.

The soaring costs of the dairy regime led to a first major CAP reform in 1984. In that year the continuous growth of the dairy production was brought to a halt by a quota system. Production was limited, but high internal prices stayed intact, and a considerable surplus, amounting to 10% of production, still has to be disposed of by means of subsidies.

The cereals and beef sector had to wait till the early nineties for significant changes to come. The EU was then facing the establishment of a GATT agreement on trade liberalisation, which demanded major adjustment of the CAP. In 1992 Commissioner for Agriculture, Mr. MacSharry, carried through such adjustment, gradually lowering price support for beef and cereals, and introducing direct income support in these sectors. Direct income support is defined as ‘not trade distorting’ under current GATT/WTO rules.

The GATT agreement, concluded in 1993, committed the participating industrial countries to gradually reduce domestic support of agriculture by measures defined as trade distorting, by 20%. Export subsidies are to be reduced by 36%, and the volume of subsidised exports by 21%. All import restrictions must be redefined as tariffs, and tariffs are to be reduced by 36%. These commitments must be met in a 6 years period, from 1995 to 2001. Minimal market access is to increase to 5% of internal consumption, over a period of 10 years.

These developments have led to radical changes in the allocation of the CAP budget. Export subsidies cost over 9 billion Euro, representing 30% of total CAP expenditure in 1992; this was reduced to less than 6 billion, 15% of the budget in 1997. Over this period the share of the MacSharry direct payments rose to 20 billion Euro, 49% of the 1997 budget.

The effect of these changes on external impact has, however, been limited. In spite of GATT and MacSharry reforms, the EU by far applies the most export subsidies of all GATT participating countries. Of the $7.6 billion export subsidies reported for 1996, the EU accounted for 84%. Due to a careful choice of reference years (the chosen period being marked by extremely high figures for export subsidies), the EU has needed only minor adjustments to fulfil GATT export commitments.

Tariffication has led to tariff levels that are high enough to effectively limit imports. Market access to the EU has hardly improved, while the share of developing countries in EU imports has gradually fallen.

Moreover, it is highly questionable whether direct income support, the compensation system the EU is increasingly turning to, is actually not trade distorting. Whether making use of export subsidies, processing subsidies or direct payments, the EU can still sell its produce at a price below actual production costs. At the same time, direct payments do enable farmers to invest in agricultural development, which also strengthens their position in the world market.

Total support of EU agriculture has only increased since the ‘86-’88 GATT reference period. Support per hectare of farmed land is now over 3 times the OECD country average.

3.2 Agenda 2000

Once again, the EU faces a number of external and internal developments that demand profound policy changes.

Under the World Trade Organisation, the successor to GATT, new multilateral negotiations are likely to start next year. They will most probably lead to increased pressure to continue the liberalisation of the agricultural sector.

A second development is the future integration of a number of Central and Eastern European countries (CEEC’s) into the EU. Applying the current CAP instruments in these countries would bring about soaring costs for the CAP budget, and at the same time it would risk creating income disparities and social distortions within the future member states.

A third argument for policy reform is the expectation that global demand for agricultural products will rise as a result of a growing world population and increasing incomes. According to the European Commission maintaining the actual CAP would block the opportunities offered by this development, and would lead to continued gaps between Union and world prices.

Therefore, the Commission has proposed to reform the CAP, the objectives being to improve competitiveness of EU agriculture and facilitate the integration of the future CEEC member states.

Its ‘Agenda 2000’ proposals mainly concerned the crop sector (cereals, oilseeds and protein crops), the beef and the dairy sector. They extend the 1992 MacSharry reform through further shifts from price support to direct payments, also for the dairy sector. In March 1999 EU Agricultural ministers reached agreement on the reform proposals, seriously reducing their impact. The Heads of State, in their final agreement, further weakened the scope of the reform.

For the beef sector the agreement is as follows:

• intervention prices fall by 20% in three steps as from 2000,
• direct income payments are more than doubled,
• a direct payment for dairy cows is introduced.

For the crop sector the agreement it is decided to:

• cut intervention prices by 15% in 2 stages between 2000 and 2002,
• compensate for this reduction with a ‘non crop specific area payment’,
• fix a compulsory set-aside rate at 10%.

The dairy sector faces the following measures:

• intervention prices are reduced by 15% in three phases, starting from 2005/2006
• milk quotas are increased by 1.5% for all member states as from 2005, with immediate increases as from 2000 for 4 member states,
• as from 2005 a direct payment is introduced, adjusted to average yield.

In spite of the 1997 coherence resolution, so far no assessment has been made of the impact of the Agenda 2000 proposals on developing countries. It is, however, highly questionable whether the CAP reform proposals will actually improve the position of developing countries in their trade relations with the EU. Prospects are not encouraging.

• The reform further de-links prices from incomes. As farmers are compensated for price falls, EU products can still be sold below cost price at the world market and contribute to low world market prices.
• Lower internal prices may reduce the use of export refunds, which helps in meeting WTO obligations. At the same time Agenda 2000 is not radical enough to abolish export subsidies. The combined use of export subsidies and direct income compensation might well sustain or even strengthen the position of the EU in the world market. Similar policy changes in the beef sector have hardly levelled the playing field.
• The enlargement of the EU dairy quota by 1.5% will increase existing surpluses for dairy even further. For dairy, it is expected that internal demand will not grow significantly over the next few years; therefore the extra surplus will have to be sold on the world market. At the moment the EU surplus amounts to roughly 10% of production, which represents about 50% of world dairy flows. A 1.5% growth of production, sold entirely on the world market, would lead to a 7.5% increase of world market supply. This would seriously affect world prices, and consequently the development opportunities of developing countries.

The conclusion might be that Agenda 2000 does not reduce external trade distortions, in spite of reduced prices. The policy is not to reduce surpluses, nor will it lead to higher prices on the world market. Support of agriculture continues to be extremely high, while targeted export subsidies are still a legal means to stabilise internal markets. And farmers in developing countries may well reap the sad fruits of this.

4. Evidence of CAP-related incoherence

In the past some cases of trade distorting subsidised exports, notably the beef dumping in West and Southern Africa, have drawn attention as examples of blatant incoherence. They may have overshadowed the fact that trade distortion is not a question of exceptional cases, but rather inherent to the CAP philosophy. The EU spends over 40 billion Euro annually on the support of its agricultural sector. Some 15% of that, 6 billion Euro, is spent on the highly distorting instrument of export subsidies. Farmers are paid almost 30 billion Euro as direct support, while even processing industries receive over 1 billion Euro bonus.

Such policy does definitely not contribute to the ‘sustainable and social development of developing countries’ and the ‘smooth and gradual integration of developing countries in the world economy’, as a broad range of example will illustrate.

4.1 The world dominance of the EU dairy sector

‘We urgently need import quotas’, said Jorge Rubez, president of the Brazilian organisation ‘Leite Brasil’, during a protest meeting of Brazilian dairy farmers in December last year. He suggested that Brazilian farmers need better protection against cheap imports of dairy products, and especially against highly subsidised imports coming from the EU.

The EU is the world’s largest dairy producer, with more than 20% of total world production. The EU is also the largest exporter of dairy, with a share of 50% of the world market. The EU dominance over the world market is remarkable, in view of high price levels within the Union. Farm gate prices within the EU are twice as high as prices in other major dairy exporting countries:

Farm gate prices in major dairy producing countries in 1996

(1US $ = 0.85 Euro)

(Source: LNV)

High internal prices have been the core of the EU dairy regime since its design. Already in the seventies the dairy regime led to considerable surpluses, resulting in high export costs and the build-up of costly stocks. In 1984 a major reform was implemented to overcome these market imbalances. While maintaining the old system of market support, production was bound to quota. The quota system has curbed the upward trend in production and the costs of the dairy regime. With 3.1 billion Euro total costs are now back at the 1981 level.

But in spite of the quota system and declining budgets, still a considerable surplus is produced. Actually EU dairy production amounts to about 120 million tonnes per year. Consumption does not exceed 105 million tonnes, so roughly 10% of total production is exported each year. Marketing of this surplus is only possible with aggressive support of the sector. Out of the 3,1 billion Euro dairy budget, more then half, 1,7 billion Euro, is spent on export subsidies. Subsidy levels differ per product:

World market prices and export subsidies (December 1997)

(Source: USDA)

EU subsidies set world prices at a level few other countries can compete with. Only two other players manage to play a significant role in the world market: Australia and New Zealand. Without the high levels of support characteristic of EU policy, these countries manage to provide roughly 43 % of the world market’s supply.

The price level set by the three large players on the world market has multi-faceted effects. On the one hand it allows importers in developing countries to buy cheap dairy that will meet a growing (urban) demand. It may also give processing industries the opportunity to buy cheap inputs for manufacturing. On the other hand, the imported dairy presents a serious disincentive for farmers in importing countries.

Such situations exist for example in Brazil and Tanzania. Both countries are facing a growing demand which the agricultural sector is not able to meet. Both countries still have considerable production potentialities, while they both see their markets being distorted by cheap imports, whether from neighbouring countries that are more efficient producers, or from the EU, less efficient, but more powerful. Brazil is one of the largest importers of European dairy, and Tanzania one of the smallest. But in both countries, the impact of the EU dairy policy is significant. Jamaica has seen increasing imports after the liberalisation of the dairy market. Production opportunities of local farmers seem to have been disrupted.

4.1.1 Production potential in Brazil

From October to December 1998 Brazilian farmers protested heavily against the abundant import of dairy products, paying specific attention to the threat of subsidized imports. On the ‘Public Hearing on Losses Suffered by the National Dairy Production Chain, That Were Caused by Unnecessary and Disloyal Imports of Dairy Products’, organised in December last year, it was acknowledged that Brazil is not self-sufficient for dairy, and that imports are needed. ‘Imports are considered normal by the production chain. However, a large portion of imports are against producers interests, operations loaded with subsidies, such as those from the EU’, said Jorge Rubez, president of ‘Leite Brasil’.

Brazil counts about 1.2 million dairy producers, with a rapidly growing production capacity. Milk yields are low, but rising: from 900 kg/cow in 1993 to 1200 kg/cow in 1997. Over the last 10 years total production rose by 5% every year, to an amount of 20 billion litres of milk in 1997. Demand, however, grew at an even faster pace. Over the last 3 years, dairy consumption rose by 26%, from 18 billion kg of milk equivalents in 1994, to 22 billion kg in 1997.

In order to meet demand, considerable quantities of dairy have been imported, making Brazil the world’s largest dairy importer. Major sources of imports are of course Mercosur partners Uruguay, and especially Argentina. Their share in Brazilian imports is growing and is now at a level of 67%. They are followed by the EU and New Zealand, with each 12% of total imports.

In 1997 EU exports to Brazil totalled 224 million kg milk equivalents, with a value of over 63 million Euro. Especially skimmed and whole milk powder were imported, and to a lesser extent also cheese. Exports to Brazil cost the EU an estimated 30 million Euro of export subsidies.

Imports of cheap and subsidised dairy products have led to continuous pressure on market prices in Brazil. Farm gate prices have been falling steadily since 1994. At a level of US$ 0,24 they are now well below production costs, which are at an average of US$ 0,28.

Brazilian farmers have asked their government to limit imports, by raising Mercosur import tariffs and improving quality control. They thus hope to receive higher prices, which would enable them to further modernise production and catch up with growing demand.

The recent devaluation of the Brazilian Real is likely to have led to falling imports. Monitoring the current EU exports to Brazil could prove if this has actually resulted in fairer market conditions.

4.1.2 Development of the Tanzanian dairy sector

The Tanzanian dairy market is limited, but growing. Demand is much higher than supply, so for years now the country has imported milk powder and evaporated milk, for a large part from the EU. EU dairy exports to Tanzania valued nearly 1.5 million Euro in 1997, with export refunds amounting to over 600,000 Euro.

The Tanzanian dairy sector faces many constraints, among which are the lack of a co-ordinated dairy policy, lack of efficiency in primary production, processing and marketing, and low organisation level among primary producers. The introduction of Value Added Tax seems to have weakened the position of locally produced dairy, compared to imported milk products.

Various foreign donors attach great value to the development of the dairy sector, and finance dairy projects. One such project is the Tanga Dairy Development Programme (TDDP), a smallholder development programme that has also been involved in the establishment of a dairy plant. TDDP receives about 200.000 Euro/year from the Dutch government, but has incidentally also received money from the EU.

The management of TDDP complains that subsidised dairy imports do not just fill in the gap between supply and demand, but that they distort the Tanzanian market. TDDP’s team leader L. Schoonman says: ‘Imports of powdered milk present a real risk for our project, especially when customs are defrauded. Powdered milk puts a pressure on prices, and I fear for our farmers when imports are not limited.’ L.R. Kurwijila, chairman of the National Dairy Board, agrees with that: ‘Locally produced dairy products will fail to compete favourably with the relatively cheap imported products especially when the price is the most important factor for consumers in deciding among dairy products.’

It is true that EU milk powder is sold cheaply at the markets of Dar es Salaam and other cities. It is also true that the Tanzanian dairy sector, fragile as it is, has considerable growth potentialities. It might play an important role in the economic development of the country, if not disturbed by larger players in the field. The EU should be the first to realise that, and closely monitor the effects of its exports.

4.1.3 Problems in Jamaica

Until 1991 the Jamaican government protected its dairy sector by means of high import tariffs. From 1987 to 1991 local dairy production grew by 58% to a total of 38 million litres. As from 1992 tariffs were reduced significantly, and since then dairy output has fallen considerably. Imports, on the contrary, have increased, reaching about 8 million kg . The European Union alone exported 4 million kg of subsidised milk powder to Jamaica in 1997. Jamaican farmers, unable to sell their product, face overflowing coolers, and are reported to have emptied them on the street. 48-year old dairy farmer Roger Edwards complains: ‘It is just not fair to us. We are producing a local product, fresh milk, and the government is killing us. They are helping these pirates to bring in powdered milk and kill our local industry’,

In the meantime an anti-dumping resolution, tabled by the Jamaican government at the February meeting of the Group of 15, has been accepted, and it was decided that the issue will be taken to the next WTO meeting.

4.2 Processing support, a fair risk of overcompensation

As for a number of products internal price levels within the EU are higher than world market prices, agro-processing industries have to pay more for their raw materials than they would have to on the world market. In order to compensate processors for this relative disadvantage, the EU has developed compensatory schemes that makes up for the gap between world market prices and EU prices.

Budget line B01-151 covers support of the processing of fruits and vegetables. In 1997 expenditures in this budget line amounted to 659 million Euro. More than half of this was given to processors of tomatoes, provided that they pay a minimum price to the producers of their raw materials. Processing of fruits, such as peaches and pears, came second.

The compensatory schemes are characterised by a lack of transparency and high susceptibility to fraud. In practice they do not only make up for higher internal price levels; most often they provide EU industries with a favourable starting position on the world market. In marked cases they enable industries to intrude on third markets at the expense of local industries or local farmers.

4.2.1 Export of tomato concentrates to West Africa

The EU is the world’s second producer of tomato concentrates, after the United States and before Turkey. EU tomato production enjoys support through a Minimum Grower Price Scheme. Farmers are paid a minimum price, which is above world market price. This requires the EU on the one hand to maintain protective tariffs and, on the other hand, to compensate the tomato processing industry for the cost increasing effects of the price scheme.

In 1997, 372 million Euro was spent on processing support for tomatoes. With a total production of 7.9 million tonnes, average support was 47 Euro/tonne of fresh processing tomatoes, which is considerable compared to the minimum grower prices of 90 to 150 Euro per tonne.

At present a large number of fraud cases are investigated in Italy. It is reported that 80% of the farmers make use of illegal labour. Industries appear to tamper with their contracts with farmers and with the quantities of tomatoes they process. Systematic fraud would make it even more wry that the same processing support seriously affects development opportunities in the South.

Most of EU exports go to North Africa, the Gulf States and West Africa. West Africa imports 20% of total EU exports, which covers 80% of total regional demand. Processing support has enabled exporters to sell concentrates at very low prices in this region.

Most West African states developed there own processing industries already in the sixties. Some of these industries have already been closed down, others are struggling to keep afloat. The devaluation of the Franc CFA in 1994 brought new impulses for the factories in the Francophone countries, but competition from EU industries continues to be fierce.

In Senegal tomato cultivation was introduced in the seventies. Since then tomatoes have taken an important position, especially for farmers in the river valleys, for whom tomato production constituted an important opportunity to diversify their farming systems, and stabilise incomes.

Since the early nineties production has been falling, however. In the season of ‘90/’91 production of concentrate tomatoes was 73 000 tons and Senegal exported concentrate to its neighbouring countries. Over the last 7 years total production fell to less than 20,000 tonnes.

One of the main factors in this dramatic fall was the liberalisation process the Senegalese government has initialised in the nineties. In 1994 imports of tomato concentrates were liberalised. EU exporters took their chance, and as from 1995 exports to Senegal grew considerably.

At present SOCAS, the one Senegalese processing firm that has survived, buys large quantities of triple concentrate, which it processes into the more regular double concentrate. Imports of triple concentrate have been rising steadily since 1994.

EU exports of tomato concentrate to Senegal in tons and Million Euro

<12% + 12 - 30% + >30% dry matter (normal, double and triple concentrate)

(Source: Eurostat)

Roughly 1 million Euro has been paid by the EU to Italian processors to produce the quantity of concentrate exported to Senegal, amounting to one third of the total value. The import of triple concentrate may thus provide SOCAS with a cheap means to make use of the industry’s full capacity. For tomato growers on the contrary, EU imports pose a major threat.

Lack of credit facilities and low prices have led to stagnating investment and innovation.

It is unclear whether tomato production in Senegal will survive the actual crisis. Breaking the downward trend demands good investment opportunities and therefore stable prices. Increasing imports of triple concentrates are in conflict with that.

The same counts for Burkina Faso and Mali, where local processors have also turned to importing triple concentrates, instead of buying local tomatoes. Neighbouring country Gambia serves as an important transit route for West African countries. Small as it is, it imports even more tomato concentrate than Senegal does; about 4600 tonnes in 1997. In the Gambia, tomato concentrates increasingly replace the consumption of fresh tomatoes. As vegetable growing is a major female activity, particularly female farmers seem to lose income opportunities.

Ghana still had 3 tomato processing plant operating in the early eighties. Two of them have closed down in the eighties, the third one now produces fruit juices. The Pwalugu plant in the North of the country used to employ 100 staff, and 300 seasonal labourers in the late seventies. More than 10 000 farmers used to sell tomatoes to the factory. The factory has never worked at full capacity, and had to close down in 1981. Ghana’s demand for concentrate is now met by imports. The country has become Africa’s largest importer of EU tomato concentrate, with imports amounting to 10,431 tonnes in 1997.

Since two years the Ghanaian government has been looking for a private company that is interested in buying and reviving Pwalugu. Tomato multinational Heinz has recently shown interest and has checked the possibilities of the plant. But Thomas Abasah, of the district assembly, says: ‘The whole factory is terribly outdated. We need new machines. The whole thing needs massive investment. But who is going to do it, as long as the European tomato tins flood our market?’

Closing factories in South Africa

In 1997 the EU spent 144 million Euro on the processing of fruits, mainly peaches. The last few years, South African canning industries have met increasing competition of European canners. In 1997 the South African government dismantled its General Export Incentive Scheme (GEIS). GEIS had enabled the South African canning industry to compete with EU exporters on third markets. Firms are now losing ground. Job losses seem to be the result. In 1997 one of the major canning firms closed down its plant in Paarl, resulting in the loss of 2000 seasonal and 400 permanent jobs, and a great many associated jobs under threat.

Most factory workers were women. Susan, supervisor/clerk at the Langeberg Factory in Paarl: ‘One night in November last year the Superintendent gave us letters to read and then told us we’d lost our jobs. We must leave the factory. My mother depended on me. Now we depend on her.’

Source: ‘Ek het niks’

4.3 The bulging market of meat

In the past, the EU has developed a large surplus of beef. The internal market was kept in balance by expensive buying schemes and heavily subsidised export schemes.

Despite MacSharry’s reduction of beef prices, surpluses are still considerable. By the end of 1998, there was still over 400 000 tonnes of beef in stock. This time the EU strategy to dispose of surpluses, is to intensify exports to Russia. For a large part, these exports are disguised as food aid.

Russia is now also a major market for pig meat. The EU pig meat market is extremely imbalanced. To solve market problems, Brussels relies on the instrument of export refunds.

4.3.1 The continuing story of beef

In 1993 Eurostep launched an advocacy campaign against the dumping of beef in West Africa. Export subsidies of nearly 2 Euro/kg, over three times the actual value of the low grade beef, had resulted in soaring exports to the West African coastal countries. These regions had traditionally been supplied by cattle farmers in the Sahel zone. But as EU exports to the region increased sevenfold from 1981 to 1991, the share of Malinese and Burkinabe beef in the coastal countries’ consumption fell dramatically. In the early eighties, two thirds of all beef consumption in Ivory Coast was supplied by cattle from Mali and Burkina Faso. By the early nineties less than a third of all beef consumption of Ivory Coast originated in the Sahel. In Benin’s major cities the consumption of non-African beef increased from 8% in 1980 to 71% of total consumption in 1991.

From 1984 to 1993 the EU spent some 450 million Euro on export refunds for meat destined for West Africa. At the same time tens of millions of Euro’s from the European Development Fund were invested in the development of beef production and marketing in West Africa.

Intensive lobbying against this clear case of incoherent policies led to the European Commission adopting an internal guideline, in which it was admitted that there had been ‘serious effects on local production, on regional trade and on livestock projects financed by the European Development Fund in the region’. It was concluded that it was ‘necessary to take immediate measures to end the lack of coherence between the Community’s agricultural policy and the development policy’.

Indeed steps were taken, and export refunds on beef destined for West Africa were reduced by 28%. Together with the devaluation of the West African currency in January 1994, which had doubled the price of all imports, this led to major improvements for Sahel cattle farmers.

All is well that ends well, but apparently the story had not ended yet.

In 1994 the government of South Africa lifted quantitative restrictions on beef imports. EU beef traders immediately started to target the South African market. EU beef exports rose from some 6,6000 tonnes in 1993 to nearly 46,000 tonnes in 1996. By that time EU beef accounted for over 11% of the local beef market, compared to less than 1% in the early nineties. In the C-grade meat sector, EU imports even accounted for 70-80% of the South African market.

On the devaluation of the Rand the EU responded with a further increase of subsidy levels. In 1996 export refunds paid to EU beef traders were 2.5 times higher than the FOB value of the meat concerned.

The rise in imports was particularly threatening for Namibian farmers, producers of mainly C-grade meat. European competition in this sector made prices fall from 216 cents/kg in early 1995 to 131 cents in June 1996. Similar to the Sahel region, EU trade policies clearly conflicted with development activities. As development of Namibian beef production had been given great priority after independence, the EU had made available 3.75 million Euro in support of a wider programme to develop livestock marketing.

After official protest by the South African government and renewed NGO actions the EU reduced export refunds by a total of 70 % in 1997. Although refunds still exceed the actual FOB price of exported meat, EU exports have fallen to some 8,000 tonnes in 1998.

And still the story has not ended.

At the end of 1998 EU intervention stocks of beef amounted to 429,855 tonnes, which is over 5% of the annual production of 8 million tonnes. The European Commission wants to dispose of stocks as quickly as possible. It has found a new outlet in Russia. At the moment, Russia takes 37% of all EU exports of beef.

In March 1999 Russia and the EU agreed on a food aid package, including 150,000 tonnes of beef. This transaction may bring serious relief in EU intervention stocks, but it is highly questionable what effects it will have on the Russian market. Russian experts have expressed their fear that the food aid package will give the death blow to the Russian beef sector. The rouble crisis, which caused food imports to plummet had given Russian producers an opportunity to fill the gaps in the market with their produce. Y. Serova, head of the Food Economy think-tank at the Institute for Economic Problems in the Transition Period, says: ‘But our producers will lose that market altogether if they do not use that chance within a year of two at the most’. He is afraid that foreign food aid will deprive them of that opportunity.

4.3.2 Dumping of pig meat in CEEC’s

Over the last few years surpluses in the pig meat sector have become another major problem.

The CAP includes a light regime of support for pig meat. Originally this regime was meant to compensate farmers for high feed costs, due to high cereal prices within the EU. Import tariffs were based on a calculation of a cost price that took into account high cereal prices. Export subsidies were meant to bridge the gap between the higher European cost price and external prices. This relative disadvantage for European farmers had since long vanished, due to high feed efficiency, the cheap imports of other feed stuffs, such as tapioca and citrus pulp, and to the reduction of cereal prices since the MacSharry reforms. But in spite of these developments the pig regime survived. GATT commitments slightly altered the support system, but the actual impact of GATT was limited.

Recent developments show that the EU uses its export refunds not only to ‘bridge the gap between EU and world prices’. When serious problems arise, Brussels does not hesitate to launch subsidies as a means to clean up its own market.

In 1998 economic crises in East Asia and Russia led to the collapse of Russian, Japanese and Korean demand of pig meat. The EU pig meat market, already destabilised by the developments after the pest crisis, saw its surpluses grow and its prices fall. When prices were at the dramatically low level of 95 Euro/100 kg, the European Commission took action. In October Brussels raised export refunds to Eastern Europe from 30 to 40 Euro/100 kg, almost half of the meat’s value.

In taking this decision the European Commission ignored the fact that Eastern European countries were facing exactly the same problems, as Russia had traditionally been their main export target. The collapse of the Russian market caused great problems on the Polish, Czech and Hungarian markets. The situation worsened as these countries saw themselves confronted with a sudden increase of EU meat imports at extremely low price levels.

Already before export refunds were raised, the EU share in the Central European market was considerable. In September 1998 imports of pig meat accounted for 15% of the pork processed by Czech meat firms. Hungary had seen EU imports jump by 300% over the first half of the year, compared with the same period of 1997.

But the EU subsidized exports seriously worsened the situation. By the end of 1998 Czech processors had to pay 34 Czech crowns/kg at the farm gate for domestic meat, compared with only 20 Ckr/kg for pig meat imported from the EU. (1 Euro = 35.6 Ckr)

In November 1998 the Czech government dared the European Commission by threatening to suspend the 15% preferential tariff on pig meat from the EU, and go back to the standard 41% import duty. According to their minister of agriculture the domestic Czech market had collapsed as a result of increased EU exports.

Although the Commission officially did not agree on the statistical basis of the Czech complaint, it did cut export refunds to Eastern Europe by 50% in December. This ‘gestion of goodwill’, as Commissioner for Agriculture Franz Fischler would call it later, rapidly led to a 6 Ckr/kg rise in price in the Czech Republic.

But still the Central European countries experience detrimental effects of Brussels’ ways to handle market surpluses. In order to ‘help’ Russia in its economic crisis, Brussels introduced a special 70 Euro/kg refund for exports of carcass pig meat to this country in December 1998. In February 1999 refunds on processed meat were raised by at least 60%. The Commission’s decision to cut refunds to Eastern Europe does not affect the subsidy levels for Russia. The Russian market is consequently lost for its traditional suppliers, who are unable to compete with prices set on the Russian markets by their friends in the EU. ???

The finance ministers of the 5 ‘first wave countries’ have criticised the EU for the use of export subsidies. Polish minister Bakerowicz: ‘They are harmful, they complicate our economic situation and they set a bad example.’

Trade distorting exports to Eastern Europe are even more remarkable, as the EU is investing large amounts of money in the economic development of these countries. The objective is to prepare candidate countries for accession to the EU. In 1997 more than a billion Euro was channelled to Eastern Europe through the SAPARD programme. Poland and Romania were the largest beneficiaries, receiving respectively 148 and 100 million Euro.

Over 1998 EU pork production rose by 6.6% to over 17 million tonnes. Consumption rose by merely 5.6% to 15 million tonnes, meat in private storage included. The sector now produces a surplus of over 2 million tons per year. In its Long Term Prospects working document, the Commission expects production in the CEEC’s to grow, and consumption to stagnate.

In spite of these prospects, the Commission maintains what might be called an ostrich policy. The actual strategy of exporting problems to neighbouring countries is a mere incentive for the sector to continue its unbridled growth, leading to high costs: not only for EU tax payers, but particularly for pork producers in target countries. It raises fears for export strategies in the future.

Sources

• Y. Jadot, J.P. Rolland, Contradictions in European Policy towards developing countries, 1996, Solagral
• C. Stevens, J. Kennan, J. Yates, Levelling the field, 1998, CIIR
• Food for thought, Cap reform and agricultural development in Southern Africa, 1998, European Research Office, with Global Food Security Group-Ireland and Fonds voor Ontwikkelingssamenwerking Belgie.
• Eurostat
• 27e Financieel verslag betreffende het E.O.G.F.L. afdeling garantie, begrotingsjaar 1997, European Commission
• De toestand van de landbouw in de Europese Unie, verslag 1997, European Commission
• Agra Europe, November 1998 - April 1999
• East Europe, November 1998 - April 1999
• Suns, South-North Development Monitor, third world network, several issues, 1998-1999
• H.J.A. Baas et al, The World Dairy Market, 1998, Rabobank
• Long term prospects, grains milk and meat markets, 1997, European Commission/DG VI
• E. Farina et al, The impact of deregulation on the milk agribusiness system in Brazil 1998, Ministerie van Landbouw, Natuurbeheer en Visserij (LNV)
• Dary: world markets and trade, FD 1-98, USDA circular series
• S. Verwer, report on dairy sector in Tanzania, 1999, University of Nijmegen, forthcoming
• Agrapen, De zaak tomaat, 1998
• ‘Bittere Oogst’, Documentary EO Antenne, February 1999
• J. Head, ‘Ek het niks’, the impact of European Union policies on women canning workers in South Africa, 1998, Ibis, One World Action and Terre des Hommes
• Websites of European Union and Produktschap voor de Zuivel
• Personal communication with Moussa Ba, consultant in Senegal, José Edson Rosolen, Leite Brasil, Gert van der Bijl, CLM, Paul Goodison, ERO, Heerko Dijksterhuis, consultant in Ghana, and several others.

Brussels/The Hague, April 1999

This paper has been prepared for Eurostep by Novib (Rian Fokker & Jan Klugkist).

Updated on 5 May 1999
Please address comments to Eurostep (Guggi Laryea/Yvette Pierret)
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