The lay of the land

While we may be familiar with the European Union's control of farming, less is known about the World Trade Organisation that formulates the rules of trade between nations, in all goods and services, on a global basis. That said, current negotiations could have a fundamental impact on the shape of the UK and Europe's agricultural industry, bringing significant changes in financial and insurance requirements.

In 1948, the General Agreement on Tariffs and Trade was formed to promote multilateral trade liberalisation between nations. GATT became the WTO in 1995 and now has 149 nation members. Although EU countries are individual members of the WTO, the EU negotiates as a single body, represented by EU Trade Commissioner Peter Mandelson.

There have been several multilateral negotiations since 1948, which are referred to as 'Rounds' and usually take several years to complete. The current Round is the Doha Development Agenda, which began in Doha, Qatar, in 2001 and is expected to be finalised by the end of this year.

Round history

In 1995, as part of the Uruguay Round, a specific agreement on agriculture was concluded. This agreement committed WTO members to action in three principal areas: to reduce domestic support linked to production because this can have a trade-distorting effect and, therefore, breaches WTO principles, while support not directly linked to production, such as environmental schemes, is exempt; to cut export subsidies because the use of subsidised exports allows the maintenance of high internal prices in order to support the sale of products on world markets at competitive prices, and such action can often undermine the markets of vulnerable countries; and to improve market access by reducing and removing import tariffs and their equivalents but with safeguards to prevent the sudden undermining of the domestic market.

The Doha Round proposed substantial cuts in domestic support, market protection and export subsidies, with a view to phasing out the latter. Members were also charged with taking account of issues such as the environment and the support of markets in developing countries.

Although there was a general agreement on the question of domestic support, major differences arose on export subsidies and market access leading to stagnation in negotiations. However, the Hong Kong conference last December successfully moved matters forward.

Reducing domestic support should not now be a worry for UK farmers. The EU has recently decoupled subsidy support from production - with the Single Payment Scheme - in order to limit incentives for overproduction (see pp17-18). This will reduce the surpluses that were historically sold on world markets at low prices with the aid of export subsidies. By removing the link to production, the support is no longer 'trade-distorting' and is, therefore, exempt from WTO rules.

Cutting export subsidies gained the support of members who agreed to end export subsidies in agriculture by 2013 with steep cuts in subsidies in the early years. The UK has not been a big user of export subsidies, so it is felt that the move will not have a great impact on agriculture here.

Improving market access, however, is seen as the biggest threat to EU farming. As the UK exports little outside of the EU, it has nothing to gain but much to lose if imports rise as a result of easier access to UK markets.

The EU has offered to cut import tariffs by up to 60% but is under pressure from the US and others to increase this to as much as 90%. The EU suggests its proposed cuts will double the amount of imported beef and result in price falls for poultry and beef of 25% and 15%, respectively. It also projects the loss of 600,000 jobs across farming and food processing in Europe.

UK pig producers fear the loss of thousands of jobs and the reversal of animal welfare and environmental advances of recent years, while arable farmers fear a rise in the import of cereal crops as trade barriers are lowered. This will hit prices and impact upon the financial viability of farms in this sector.

Currently, the EU provides duty free access to the world's poorest countries, absorbing 70% of all imports compared to just 17% by the US. The main beneficiaries to improved access are, therefore, likely to be the highly competitive, more developed nations such as Australia, Brazil and Argentina, not the poorer vulnerable developing nations lacking sound government, finance and agriculture infrastructures.

Disagreement continues between the EU and other WTO partners, with EU farmers unhappy that the deal seems one-sided, with little being given by the other partners. The US complains about high EU tariffs but is set to increase trade-distorting payments to US farmers. The poorer developing nations meanwhile, who are intended to be the main beneficiaries, complain that the richer nations, as a whole, are still not doing enough to help them.

Changes afoot

The commitment to WTO principles has already impacted on UK sugar beet growers, and a package of measures has been introduced to reduce surplus production during the next four years. This includes a price cut of 36% by year four, phasing out of intervention and funds to encourage farmers out of the crop.

This is just one example of the significant changes that will be faced by UK farmers. If the worst predictions are correct, there will be an acceleration in the steady pace of change that farmers have faced during the past decade.

Subsidies to farmers will continue but will not be linked to production and, with the threat of imports driving prices down, perhaps a lot more time and effort will go into the environmental management of land rather than food production. If so, this could result in a significant fall in an already declining workforce and a much lower investment in buildings and machinery. Each of these possibilities would have a knock-on effect on financial and insurance requirements.

In the past, brokers and insurers have been careful to ensure that their products and services have evolved to cater for farm diversification; in the future, the changes may be much more fundamental.

Elaine Pyke is chief executive of FarmWeb.