House of Commons - Agriculture

Select Committee on Agriculture Second Report

ORGANIC FARMING

V. FINANCIAL ASSISTANCE FOR ORGANIC PRODUCTION

67. Within the UK, support was first offered under the Organic Aid Scheme (OAS) which offered flat rates for all land types and the lowest rates available in any of the Member States.[177] Between 1994 and 1999 just 400 participants entered the scheme in England, and we had cause to draw attention in our First Report of Session 1998-99 to the underspend of some £550,000 in payments to individuals in 1997-98.[178] The scheme was reviewed in April 1998 and relaunched a year later as the Organic Farming Scheme (OFS) with "considerably" higher rates of aid and a "greatly increased" overall budget of £11.35 million in 1999-2000 and £12 million in 2000-01, compared with a high under the OAS of £1 million in 1998-99.[179] The rates of aid were also made variable, ranging from £450 per hectare for land eligible for AAPS payments, £350 per hectare for other improved land and £50 per hectare for unimproved land, paid over a five year period.[180] The payments cover the period of conversion. There are no payments aimed at maintenance of organic farming. Special provision was made when the scheme was announced for those who had joined the OAS on or after 2 April to switch to the new OFS after a year.

68. Take-up of the OFS was extremely high, with the scheme attracting 1,214 applications. Consequently, within four months the scheme was closed to new applications and the Government issued a consultation document on its operation. The results of this consultation were announced in November 2000 and it is now expected that the scheme will reopen in January 2001 for first payments in April, with a few minor changes such as extending the period for applying for aid after registration from three months to six months.[181] The budget for organic conversion money has also swelled with the implementation of the England Rural Development Programme (ERDP) which provides for expenditure of £139 million to 2006. Table 6 below illustrates total Government funding for organic conversion in the UK under the OAS and OFS, projected to the end of the ERDP. A further review of the OFS is planned for 2003 as part of the general review of the ERDP and Mr Morley assured us that it was possible that the budget might be adjusted again at that point.[182]

Table 6: OAS and OFS funding (£'000)

	Organic Aid Scheme	Organic Farming Scheme
1995-96	261
1996-97	374
1997-98	571
1998-99	1,026
1999-2000		12,037
2000*		13,400
2001		20,600
2002		19,000
2003		19,900
2004		22,300
2005		22,900
2006		22,600

* year 2000 onwards years from 16 October to 15 October

Source: HC Deb., 10 Nov. 2000, Cols 409W-410W; 29 Nov. 2000, Cols 661W-662W.

69. Mr Morley summarised the response to the consultation on the OFS as a feeling "that the current structure of the scheme was about right".[183] In contrast, we heard a number of complaints about the scheme, particularly in comparison to those operating in other Member States. In general, it was agreed that the rates payable were acceptable[184] but a number of witnesses argued that they were inadequate to meet the needs of specific sectors, especially horticulture where the costs of conversion were variously estimated as typically £2-3,000 per hectare or £10,000 per hectare over a three year period.[185] A case was also made that the UK should provide maintenance payments.[186] However, the strongest criticisms were of the stop-go approach taken to funding, which was seen to have limited the development in the UK organic sector at a critical time. This affected processors and retailers, as well as farmers who were trying to make crucial decisions whilst uncertain whether support would be available and if so, at what level. There is a constant complaint from farmers that they are forced to phase their conversion in order to fit into periods when funding is available and it is clear that some farmers have lost out because of the unfairness and lack of information. As with the other issues raised, this had severe implications for the competitiveness of the UK industry compared to the industries of countries where funds were continuously available.[187] It also created difficulties for the certification bodies who had to deal with a huge increase of applications at the beginning of the year which could have been handled more easily if spread across the whole twelve months. Given that there is a programme, we believe that the disruption in the provision of aid for organic farming at this crucial time has been highly regrettable. The Government should seek to ensure that the OFS is administered to provide even funding and applications across the whole year.

Private assistance

70. The consumer demand for organic products and the perceived environmental benefits offered by organic farming have led some private sector organisations to give financial support to producers. Examples in the retail sector given to the Committee included £3 million from ASDA over the next three years to be spent on encouraging its meat suppliers to convert to organic farming methods.[188] Wessex Water Company is also introducing a scheme of top-up payments of £40 per hectare to farmers in recognition of the contribution organic farming can make to reducing pollution of water by pesticides.[189] We understand that "at least two other water authorities" are examining the feasibility of such schemes.[190] Private sector assistance is thus available and increasing and it is to be encouraged as a means of risk-sharing but we accept that it is unlikely that the private sector, whether in the food industry or elsewhere, will be able or willing to offer sufficient incentive, either in terms of the number of schemes or the rates of payments, to make a real difference in the number of farmers converting to organic production. If the Government wishes to see an increase in organic farming in the UK, public subsidy will achieve a greater rate of conversion than otherwise would be the case. However, the Government should discuss the design of its subsidy regime with retailers, processors and the water industry. It should encourage OFWAT to review whether water companies should be obliged to offer top-up payments.

Rationale for Government assistance

71. Before determining how best to offer financial assistance to organic producers, it is essential that the Government be clear as to the rationale for doing so and the objectives it wishes to achieve through this expenditure. These objectives must be tightly defined and made public. There is, of course, a perfectly reasonable case against any aid for conversion. After all, if the market really is expanding, if retailers are anxious to provide more organic products and if organic produce commands a premium, why should the state intervene? The only argument to do so is that other countries assist organic production and that the UK has a broad economic interest in trying to satisfy as much demand as possible from domestic sources. More specifically, this argument can be broken down into three factors which can be put forward to justify public support: the gap between supply and demand, competitiveness and the pursuit of specific public goods.

72. First, on the gap between supply and demand, we recognise that the growth in the organic sector has been largely market-driven but that the costs of conversion are such that they deter most would-be organic farmers from taking the step without some form of subsidy. Some farmers have converted without public assistance but the evidence is clear that the numbers slumped when Government money was not available.[191] Of course, this also has its down-side: support could lead to a distortion of the market and might be harmful to those who are already operating in the industry.[192] In the prevailing economic circumstances, it is also possible that subsidies will attract farmers who will not be able to follow through the conversion of their land to organic production and who are motivated by the hope of finding a way out of existing problems rather than by a well thought out vision of sustainable organic production. However, the yawning gap between demand and supply, even in products capable of being grown in the UK, indicates that there are market opportunities here which, as we have seen, may not be wholly addressed by the private sector.

73. Second, there is the question of the competitiveness of the UK industry, extending beyond primary production to processing and marketing. When schemes in other Member States, in particular, are more generous, UK farmers are disadvantaged both in terms of their ability to offer organic goods and in terms of the cost of production and hence the price of their produce. Mr Morley accepted that the Government "should look at what other European countries are doing in relation to their support regimes" because "It has an impact on competitiveness".[193] This is also the case where schemes differ within the United Kingdom. For example, more financial assistance has recently been made available in Wales. Clearly, the National Assembly of Wales has the absolute right to take such action but it leaves a disparity of funding between the territories of the UK which inevitably has implications for competitiveness.

74. Third, there is justification for supporting organic farming with public money if it contributes towards wider benefits which the Government wishes to achieve. Most of those arguing for further Government assistance did so on the basis that organic farming provides public goods beyond the immediate effect on the farmer. The Soil Association claimed that large amounts of public expenditure could be saved through expansion of organic farming[194] whilst Dr Lampkin listed many public goods in terms of social, environment, animal welfare, rural development, food quality and health issues.[195] Of course, many of these claims are disputed and we also heard opposing arguments over supporting organic farming per se. Professor Sir John Marsh advised us that "Rewarding a particular system, which is defined in terms of an inflexible system of rules, is not helpful".[196] He believed that "Policy will make a much more positive impact if it identifies and rewards the specific outcomes it seeks."[197]

75. In written evidence MAFF was anxious to assure us that Government support for organic farming was predicated not upon the more doubtful claims made for public goods but on the contribution it could make to the wider Government aims of a "prosperous, forward-looking and sustainable" farming sector, which was "competitive, and flexible enough to respond quickly and effectively to market changes and consumer needs".[198] The exception to this was that Government support "takes account of evidence that the organic system of farming leads to certain environmental benefits".[199] In oral evidence, Mr Morley clarified that he believed that "there are a range of benefits, economic, social and environmental, that organic farming brings" and that Government support was justified for these reasons, as well as for issues of consumer choice and import substitution.[200] He emphasised that "there are benefits, particularly environmental benefits, which organic farming gives, which we do recognise as a public good."[201] The question remains whether these same benefits could be achieved by other means at a lower cost to the public purse. We believe that the benefits to be secured by organic farming need to be far more closely defined so that the Government can set measurable and achievable objectives for its financial assistance to organic farming. In the absence of other evidence, we recognise that the greatest claims that can be made for organic farming are environmental benefits. We believe that the OFS needs to be more closely focussed on these benefits so that farmers are paid for delivering recognisable public goods, rather than merely for converting to organic farming as a good in itself. It also means that aid for organic farming could eventually be assimilated to other schemes based on payment in return for specific outcomes or practices like, for example, countryside stewardship. We examine below suggestions for how this could work.

Options for consideration in the 2003 review

76. The review of the ERDP in 2003 will give the Government a useful opportunity to consider the objectives and structure of its support for organic farming. In discussing criticisms of the existing scheme, we have already touched on some options which should be considered. These include differential rates of aid to reflect the true cost of conversion in sectors such as horticulture, although we recognise that research remains to be done on establishing these costs. We recommend that in advance of the review the Government commission such research in order that its consideration of differential payments be properly informed. Another suggestion is that the Government should target aid at sectors which are lagging behind the general trend towards organic conversion. Apart from horticulture, the obvious example here is arable land which has implications not just for processed foods but for animal feeds and hence the livestock industry. Yeo Valley Organic Company put forward an imaginative scheme for encouraging arable conversion through the use of set-aside payments.[202] Such targeting, supported also by the NFU, should be included in the options for consideration, if the current trend continues.

77. A far more radical approach, which met with near universal approval, was the restructuring of organic farming support within an organic stewardship scheme. This would recognise that the payments are made to farmers for the benefits they bring to the environment and would give the Government a means by which they can specify the benefits to be realised in each case. It would meet the demand for a maintenance scheme in that the money would be available to farmers after conversion as well, including those who at the moment are disqualified from applying for OFS because they have received organic funding in the past or had registered organic land before the OAS/OFS started.[203] The Soil Association was strongly of the opinion that "an organic stewardship approach is a better way of doing it than a front-end loaded scheme which gives a carrot tomorrow and really does not encourage people to think through their marketing and how they are going to deal with their business over time".[204] The Organic Farmers and Growers also preferred this approach which would ensure a steady growth in the market, rather than a sudden surge as happened at the moment.[205] Finally, a stewardship scheme would represent a move away from production payments, as we have consistently advocated should be the trend for all farming subsidies.

78. Mr Morley was sympathetic to the principle of an organic stewardship scheme,[206] although he stressed that "at the moment our priority is to provide funds for conversion".[207] More recently, the Minister, the Rt Hon Nicholas Brown MP, has expressed stronger support for such a scheme in his address to an organic farming conference. There are many details which would have to be worked out before the proposal could be put out for consultation. For example, whether the scheme should be a specifically organic stewardship scheme or whether there should just be greater recognition that organic farming may be intrinsically better positioned to meet the criteria of ongoing agri-environmental programmes, such as countryside stewardship, through its delivery of environmental benefits. We believe that both options should be explored. There may also be a continuing need for subsidies to cover the initial costs of conversion over and above the level of ongoing payments in certain sectors. Another factor to be considered is the current "profit-forgone" structure of agri-environmental support which might need to be revisited. There are two features, however, which we would wish to see included in any scheme. First, we recommend that applicants to the scheme be required to produce a business plan which is accompanied by a statement as to its validity from a qualified adviser, such as a bank, accountant, consultancy or agricultural organisation. This suggestion was rejected in the Government's recent review as too bureaucratic[208] but we believe it is essential - the discipline of the exercise also has value. Second, we recommend that, whatever scheme is devised, it be flexible, locally-run and as unbureaucratic as possible. We recognise that Governments seek administrative simplicity but if the change in regional representation of MAFF, with its greater emphasis on using modern information technology flexibly, is to mean anything, it should be possible to manage a flexible scheme responsive to local conditions without turning it into a bureaucratic nightmare. The farmers who gave evidence to us asked for simplicity, certainty, fairness and predictability.[209] These should be the hallmarks of all good administration and we expect attention to be paid to these factors in this case. We recommend that the Government devise proposals for an organic stewardship scheme as the centrepiece of its review of organic farming support in 2003, taking into account the need for clearly defined goals and for flexibility, simplicity and predictability. These proposals should be accompanied by a statement of objectives and plans for the achievement of those objectives, including the resources to be allocated to their achievement.