January 9, 2016

Brexit & The Importance of CAP Payments to British Farming and the Countryside

Filed under: Agriculture, Brexit, CAP, Uncategorized — drderrick @ 1:29 pm

The upcoming referendum on UK membership of the European Union will be one of the most important decisions in a generation for British farmers. Passionate views are held on both sides of the argument, and many claims – both for and against – will be made. One thing we do know is that if the UK votes to leave the EU (Brexit) the European Common Agricultural Policy (CAP) will no longer apply to British farmers. Undoubtedly there would be benefits of leaving the CAP, but there would also be some potentially important losses as well. Chief amongst those losses would be the loss of the £3 billion CAP budget. Broadly speaking, from this £3 billion some £450 million is used to fund the agri-environment schemes, and the balance – £2.5 billion – supports farmers through the SFP It may well be that the HM Treasury will maintain the payments to farmers from the overall budgetary savings of Brexit, but they may not. Without clear unequivocal assurances from HM Treasury that the payments will be maintained, there is a risk that Brexit will mean the end of the Single Farm Payment (SFP).

What would British farming look like if the SFP ended? This is a complex question, and it is not possible to foretell exactly what would happen. The prosperity of British farming is influenced by many more factors than the SFP, and farm businesses will respond to the changes in the market that the end of the SFP would cause. Nonetheless, we can get a fairly good idea of the scale of the risk of losing the SFP by examining the latest Farm Business Accounts (FBS) for England alongside other official statistics published by Defra.

The FBS breaks farm business income down into four key areas: income from farming, income from diversification, income from agri-environmental schemes, and income from the SFP.

For All Types of farms, the latest accounts (2014/15) show:

FARMING income: £2100, down 69% yoy
DIVERSIFICATION income: £9300, up 11% yoy
AGRI-ENVIRONMENT income: £5900, up 13% yoy
SFP income: £22,400, down 2% yoy
TOTAL FARM BUSINESS INCOME: £39,800, down 8% yoy

But these are aggregate figures for all farms of all types, and there is a wide range of size and business performance amongst the 103,000 farm businesses in England. Fortunately, the FBS also provides accounts for the different farm sizes and performance groups, as well as for the different types of farm, which allows us to examine more closely the consequences of different changes.

Assuming income from farming and from diversification remain unchanged, and that the agri-environment schemes remain fully funded by HM Treasury, by removing the SFP from the farm accounts we begin to get a picture of what would be at risk if the SFP ended.
Over 50,000 farms – over half of all farms in England – would be at risk of closing because their total farm business income would be negative. Unless income from farming and/or diversification improve significantly, all the lowest performing farms, except in horticulture, would be at risk, as would the medium performing farms in general cropping, mixed farming, and both lowland and upland grazing livestock. Overall, the end of the SFP would also mean farmland prices would fall significantly and seriously impair farm balance sheets.
• The farms at risk currently employ over 80,000 farm workers.
• The farms at risk currently manage some 7 million hectares of land – about 45% of all farmed land. To give this some perspective, currently around 50,000 hectares of farmland are marketed each year in England. While we have assumed that the agri-environment schemes are continued, it is unclear what would happen to all the environmentally-focussed land management regulations currently imposed through the SFP.
• The farms at risk currently produce over £10 billion – over 40% – of all domestically produced food. Some of this production will be replaced by higher performing farms, and some by imports, but it is a significant proportion of the domestic food supply

This analysis is not meant to suggest what will happen if the UK leaves the EU, but to provide an impression of the scale of the challenges that losing the SFP could cause. Some or all of the SFP may be maintained by HM Treasury after a Brexit, and there will be many other factors affecting what actually happens. But it certainly appears to lend support to the vital importance of the question posed by Meurig Raymond, President of the NFU, at this year’s Oxford Farming Conference: ‘How are we going to convince the treasury to support British farming?’


February 23, 2015

Is Sterling Overvalued?

Filed under: Economic Crisis, Economic Forecast, Uncategorized — drderrick @ 10:10 am

Over the past five years trade weighted Sterling has appreciated by 8%. Over the same period, it has fallen against the US$ by 6%, and it has fallen against the Yuan by 15% – US$ and Yuan account for 17.5% and 8.9% respectively of the currency basket. The strength of Sterling is entirely due to the weakness of the Euro, which accounts for 46.2% of the currency basket, and against which Sterling has risen by 15%.

Over the past twelve months, while Sterling has fallen against both the US$ and Yuan by 11%, overall the trade weighted index has fallen by only 1%, due again to the weakness of the Euro, against which Sterling has risen by 3%.

Given its great importance, the strength of Sterling against the Euro will have contributed to the startling growth of the UK current account deficit, which now stands at some 6% of GDP – the worst ever! It will also have contributed to the weakness of UK inflationary pressure. Alongside low oil prices, strong Sterling should be seen as one of the temporary contributors to current low inflationary environment.

When the Euro eventually strengthens, the value of Sterling could fall significantly and, together with domestic political factors – discussed here: https://drderrick.wordpress.com/2014/12/29/the-sterling-crisis-of-2015/ – may lead to an overshoot, leading to an undervalued Sterling. While exporters might welcome this, it would also increase inflationary pressures, and the likelihood of the Bank of England raising interest rates.

When this happens the anaesthetising effects of the current interest rate regime will begin to wear off, and the economy will slow.

December 29, 2014

The Sterling Crisis of 2015?

By all accounts, the UK general election to be held in May 2015 is too close to call. On May 8th the nation is expected to wake up to another coalition government, quite possibly composed of three or more Parties. While the composition of the new government cannot yet be foreseen, it seems most likely that either the Conservative Party or the Labour Party will be the senior partner in whatever coalition government emerges from post-election negotiations. While for political pundits this election may well be one of the most interesting in many years, the economic risks are daunting; two very dark economic clouds are on the horizon. The first is the issue of government debt reduction, and the second is the question of UK membership in the EU.

A left-wing coalition led by Labour would put aside for now the question of UK membership of the EU, as Labour, Liberal Democrats, Scottish National Party, and the Green parties are all pro-EU, but they are expected to commit to a much slower pace of deficit reduction than is proposed by the Conservatives. Slower spending cuts, alongside any increased borrowing and higher taxes that they may propose to finance government efforts to stimulate economic growth, may lead to a significant risk that markets may well begin to lose confidence in the government’s commitment or ability to address its growing debt problem, with potentially serious repercussions for the value of Sterling.

If the Conservatives are the senior partner in a more right wing coalition their deficit reduction plans may prove politically difficult to implement, leading to politically expedient delays. The Conservative plan to eliminate a £90 billion annual deficit over the course of the next Parliament will seriously affect the well being of a lot of people, and will not happen without a great deal of political opposition. Of similar danger to the deficit problem is the question of UK membership of the EU. Responding to popular disaffection with the EU – amply demonstrated by the rise of UKIP – the UK Prime Minister David Cameron has pledged to hold an in-out referendum on UK membership of the EU by 2017, if he is returned to Office in 2015. This will cause great uncertainty amongst investors as to what the “rules of the game” will be post 2017. Such uncertainty will depress investment in the UK economy, which will further constrain economic growth and exacerbate the political difficulties of meeting deficit reduction targets. Such a reversal of fortunes would again put pressure on the value of Sterling.

Over the past four years, through a combination of luck and contrivance, the current government has enjoyed a fragile recovery from the market crisis in 2007/08. That economic growth has been due almost entirely to an accumulation of household and government debt, supported by historically low interest rates, that has been used largely to maintain high levels of current consumption. While some moderation in the growth rate of the economy should be expected over the coming years, the election in 2015 poses the greatest domestic challenge the economy has faced over the past seven years. Whichever Party holds the senior position in the government after the elections in May 2015, there is a real risk of a Sterling crisis. Such a crisis in confidence in Sterling might be welcomed by exporters, but it would also exacerbate the extremely high current account deficit, increase consumer price inflation, and necessitate an increase in interest rates faster and further than would otherwise be implemented. If this happens, significantly weaker economic performance than is currently foreseen can be expected, including a return to recession.

November 6, 2014

Outlook for UK Farm Incomes Increasingly Challenging

While the normal variance remains amongst individual farm businesses and between farm sectors, the graph below shows that, overall, income from agriculture provides a relatively small part of total farm business income.

The new CAP being implemented over the next few years creates a great deal of uncertainty for farm incomes. With support payments currently accounting for some 53% of total farm income, some decline in income seems likely.

Sources of Farm Business Income

Sources of Farm Income

Source: Defra

Over the past 10 years income from farming has doubled, and the longer-term outlook remains positive. Growth in world population and wealth, along with both technical and natural constraints on yield improvements, provide a good case for optimism about the longer-term commercial outlook for farming.

The shorter-term outlook, by contrast, looks quite difficult. Market prices, policy changes, and foreign exchange all present significant risks to farm incomes.

The latest figures show farm output prices are down 11% compared with last year, with both crop prices down (-13.6%) and animal products down (- 8.7%). Cereals prices have fallen by over 20% so far this year, and the NFU 2014 Harvest Survey, predicts average wheat yields will be the highest in 30 years – a “record high”. This suggests further output price weakness over the coming months. Input prices have also fallen, but by only 4.2%, leaving farm profitability under increasing pressure.

Changes to the Common Agricultural Policy (CAP), to be implemented from 2015, pose a number of important challenges for farm businesses. Three key challenges are:
• payment capping will greatly reduce the amounts received by larger farms
• new “greening” measures will have significant effects on land use & cropping decisions, with unknown effects on business profitability
• overlap with legacy agrienvironment schemes will impose a number of transitional and ongoing costs for farm businesses.

Compounding these difficulties are the ongoing problems in the eurozone that are undermining the value of the euro. Over the past year, the euro has weakened against Sterling by nearly 10%. Because CAP payments are denominated in euro, the Sterling value of CAP payments is will be lower in 2014 than in 2013, and further euro weakness over the forecast period is more likely than not.

September 16, 2014

Ecosystem Limits to Sustainable Economic Output and the Use of Tradable Quotas – An Essential Lesson

A mistake often made in carbon markets and elsewhere is to impose predetermined permit/obligation prices, which have indeterminate effects on the environmental objective. The following stylised heuristic highlights the importance of setting quotas on externalities with reference to the environmental objectives that are to be met, and leaving the determination of a clearing price for such permits and/or obligations to the market. Provided property rights to the relevant factors of production are well defined and enforced, by establishing a quota on the production of externalities at or below the capacity of the ecosystem, and by providing tradable permits and/or obligations to produce those externalities, the market will determine a clearing price.

The following figure provides a simple representation of the relationship between economic output and the capacity limits of the ecosystem.

Ecosystem Limits Graph

The Transformational Efficiency Boundary (TEB) represents the most efficient available means of transforming natural capital and ecosystem services into goods and services.

T 0: Transformational Efficiency Boundary at time 0

T 1: Transformational Efficiency Boundary at time 1

An economy can function above the TEB, but not below it.

As an economy grows it moves along the TEB, while technical change shifts the TEB downward.

Technical change can include socio-economic and organizational improvements, as well as technological changes, that increase the efficiency by which natural capital and ecosystem services are used by the economy to produce goods and services.

The market price of permits and/or obligations will cause such technical changes to occur – T 0 shifts toward T 1 – and ensure the maximum level of environmentally sustainable economic output.

Conclusion: Rather than setting a price for permits/obligations that has unknown effects on the environmental issue, set the quota to deliver the environmental objectives and leave the market to find the clearing price for the permits/obligations.

August 2, 2014

Developing Businesses for Better Environmental Stewardship

Over the past few decades environmentalists have produced a great wealth of evidence of a growing range of environmental problems. As a consequence, they have often advocated a moral case to encouraged people to behave differently; appealed to their “better nature”. We have heard calls to respect the inherent values in nature and to improve intergenerational equity; to “save the planet”. Despite this, virtually all the growing body of indicators show continued deterioration of the natural environment. It is increasingly obvious that this strategy is inadequate on its own.
Although many in the environmentalist community remain suspicious, more recently it has been increasingly recognised that a business case for more environmentally sustainable behaviour, can also be made; that by appealing to people’s self-interest rather than to their sense of morality and/or the common good, a range of environmental problems can be successfully addressed. From this, three additional approaches are being developed: the valuation of ecosystem services to the economy and for individual businesses; the development and integration of natural capital accounting to enable better resource and environmental risk management; and the development of novel markets for the delivery of specific environmental outcomes.

The markets within which the private sector operates lead to particular outcomes because of the structure of commercial incentives and disincentives. In most markets there has been no incentive to consider the effects of commercial activities on the natural environment, and often there has been a disincentive to do so, in that doing so individually would raise costs and depress competitiveness. As a result businesses externalise environmental costs; they disregard them. Modifying these incentives and disincentives, so that the environmental consequences of commercial activities are internalized and brought into the commercial decision-making process, can create novel environmental markets. The creation of carbon markets is a simple case in point.
Presently, it seems to me that two issues need urgent attention to progress the development of the market-based approach, and of novel environmental markets in particular.
First more work needs to be undertaken on the theoretical underpinnings of the various novel environment markets and other market-based techniques to understand better which work for what sorts of environmental issues, and under what circumstances. Trading, offsets, caps and floors, auctions, payment for services, and others all have strengths and weaknesses that need to be better understood from both environmental and business perspectives. I suspect that we would find that there is a very wide range of environmental issues to which market-based techniques could make an important contribution. There will also be many significant issues for which they would be inappropriate, and we need to have a clear idea of which are which and why.
Second, to date much of the work done on the linkages and crosswalks between ecology and economics, between the natural world and the world of business, has been led by the environmentalist community, with increasing support from the legal and large corporate communities. As a consequence, this work tends to emphasise the potential environmental benefits and/or threats of market-based approaches; the strengths and weaknesses from an environmentalists perspective.
While the environmental consequences are critically important, if the wider business community is to engage more fully with this debate, it seems to me that it would be helpful if detailed examples and case studies were used to identify the specific benefits for businesses; to articulate the many and varied positive opportunities for businesses of delivering improved environmental outcomes. Most businesses are interested in exploring opportunities to improve their financial performance, and proposals that can be articulated in such terms will find a wider and more receptive audience. To do this, more firm-level case studies that show the detailed calculations of costs and benefits for the business that will deliver the environmental outcomes need to be made available. While large companies have the capacity to dedicate personnel to engage in this debate, most firms remain unclear about the “bottomline” benefits for them of undertaking their activities in a way that would benefit biodiversity and ecosystem services. This is all the more the case in the current difficult economic climate. In short, there is an urgent need for these issues and proposed techniques to be examined from the firm-level perspective of the businesses that will make them happen – otherwise they are less likely to happen at all.

I am certainly not advocating some sort of unregulated free-for-all, and more work needs to be done to ensure that the techniques employed are fit for purpose, but if we can harness the power of millions of private decision-makers we might get more done, more effectively, more efficiently, cheaper, and with more enthusiasm than programmes and schemes that are publicly financed and administered. It seems to me that it is a prize worth serious consideration and exploration.

May 18, 2008

Meeting the great 21st century land challenge


The Food Security Challenge:

Over the coming decade, there is a serious risk of global demand for food surpassing the ability of producers to supply it. By 2050 the world population is forecast to be approaching 9 billion, or some 2.5 billion more than at present. More importantly, ongoing economic development is improving the incomes of a growing number of the people who spend on average two-thirds of their extra income on food – compared with only 10% in the UK – and whose diets change as they get richer. With increased income, diets not only increase in the volume consumed, but also change from a largely plant-based diet to one that includes more meats and dairy products, which have substantially higher requirements for land and water. At the same time, concerns about energy security and climate change, have brought about policies encouraging the development of bio-fuels that use food crops, placing additional demand on limited food supplies. According to the FAO, some 10% of the recent dramatic increase in food prices can be explained by the increased demand from biofuels, while the IMF and IFPRI suggest the impact may be more like 20% to 30%.

Figure 1: Global Food Security Outlook

21st C Fig1

Figure 1 provides an outlook on global food demand and supply. Assuming incomes grow by only 1 percent per year, it suggests that food demand could be 50% higher within the next 25 years and more than double by the end of the century.

This outlook on global food supply is estimated on the basis of current land and water use and with current yield growth rates. This shows a significant short-fall developing with the next 10 to 15 years. Factoring in the expected negative affects of climate change on yields, the outlook for supply is even more worrying. Climate change will have even more effects on supply than by affecting yields. The temperature and precipitation effects will vary greatly around the planet, with many of the poorest areas worst affected. Increasingly volatile and extreme weather can be expected, while flooding and coastal erosion will affect most of the most productive lands. Heat stress will affect livestock production, while plant and animal diseases will be increasingly prevalent. Even without the problems of climate change, the availability of suitable additional land and water, together with the necessary infrastructure, pose significant and growing constraints on supply.

Doing the same analysis at the EU(27) level provides the outlook given in Figure 2.

Figure 2 – EU (27) Food Security Outlook

21st C fig 2

It is readily apparent that while global food shortages can be expected over the coming years, EU(27) will have significant food surpluses available. The clear lesson from this is that Europe must make a contribution to the global food security challenge commensurate to our ability to do so, and doing that means maintaining and improving the productive capacity of our land-based resources..

The Environmental Security Challenge:

Advances in food production over much of the past century or so has been enormous but with unintended environmental costs in terms of both natural resource depletion and pollution. Evidence for the impacts in the EU on soils, water atmosphere, and biodiversity, for example, is widely available. Far worse damages have occurred elsewhere in the world. These problems have caused a regulatory response by governments at all levels.

In light of the food security challenge, there is a real risk of unnecessary regulation being imposed by governments who fear that, as farmers respond to increasing global food demand, nutrient leaching into water supplies will increase, a range of water stresses will increase, soils will be further degraded, and biodiversity will be reduced. Because the productivity of agriculture is fundamentally dependent on the health of the natural ecosystems, this would lead to lower yields and thus to a downward spiral.

It is essential that we find a way of avoiding such a counterproductive downward spiral for three key reasons: natural ecosystems are reaching limits that must be respected, a healthy natural environment is essential to achieving the improved productivity required to meet the food security challenge, and regulation can impair the ability of businesses to respond to food security concerns. A new, more integrated approach to meeting both the food and environmental challenges, is imperative.

The Great 21st Century Land Challenge:

The Great 21st Century Land Challenge is to deliver both food security and environmental security – to improve the productivity of the land while increasing our stewardship of the environment – at the same time!


Meeting this challenge will require addressing three key issues: food security, the implications of climate change, and environmental security.

Food Security: The key question concerning food security is the extent to which we can expect supply to respond to growing demand.

On one hand there are reasons to be pessimistic that farmers will respond fully. As prices rise, governments will seek to protect consumers by imposing a range of price controlling measures. This has happened in a large number of countries over the past few months. A result of these price controls is that price signals to farmers are muted and farmers do not respond as they might otherwise do. In Argentina, for example, it has been reported that wheat plantings are down 15% in 2008 as a result of government imposed price controls on cereals and oilseeds. At the same time, high oil and gas prices will make biofuels more commercially attractive, adding to the total demand for grains and oilseeds, while the marginal land that may be brought back into production is likely to be less productive than that already being used, and water supplies and infrastructure may not always be available where needed.

On the other hand, there are reasons to be more optimistic. A supply response will be helped by farm businesses achieving greater economies of scale and by adopting improved management and technology. Increasing global competition as a result of the liberalisation of agricultural trade has encouraged the development of more professional agribusinesses throughout the world. Investors from the UAE in Pakistan, China in Africa and South America, together with agribusiness investors in areas like the Ukraine, will all bring about more efficient and productive use of those valuable land resources in areas where the productivity of the land is currently very low. With improved profitability, farmers will be encouraged to reinvest in their businesses, and foreign direct investment in land can bring additional significant benefits. Over the foreseeable future, however, asymmetries in scale throughout the supply chain are likely to persist, so it will be important that competition policy is designed accordingly.

Finally, an adequate supply response will critically depend on yields. The analysis underlying Figure 1 suggests that, to meet growing global food demand, in the absence of substantial new land and water resources becoming available, yields across the four main arable crops – wheat, maize, rice, and soybeans – must improve each year by an average of over 2%, compared to current annual improvements of just 1.5% (and declining). Over the past decades, R&D into agricultural commodity production issues has been a very low priority for most governments, and the available budgets have declined dramatically as a result. Private sector work has continued but, to foster the significant improvements in yields that are required to deliver food security, government must lead a renewed and substantially better funded R&D campaign – in partnership with others – into improving environmentally sustainable agricultural productivity. At the same time, the public – especially in the EU – must have an open mind about and carefully evaluate of the potential of biotechnology. The extent to which these changes occur will be crucial to an adequate supply response.

Climate Change Mitigation and Adaptation:

Contributions of land managers to climate change mitigation include carbon sequestration, and improved management of greenhouse gas emissions by both arable and livestock producers. These will require significant investment in R&D and skills transfer to reach their full potential.

In addition, land managers can contribute significantly to the reduction of our dependence on fossil fuels, with benefits both for climate change and energy security and prices, by the development of a range of bio-energy technologies, including anaerobic digestion and wood fuels

Land managers must also play a leading role in climate change adaptation. In addition to ensuring flexibility of production, as the climate changes, farmers will also face increased risk of plant and animal disease. Beyond the adapting farming practices to the new environment, land managers will also be crucial to the management of natural resources, especially water. Pressures on both the quantity and quality of water resources are expected to increase with climate change.

A central feature of a future with a changing climate is uncertainty and volatility. For businesses such as farming and forestry that are long-term by their nature, this will pose a particular challenge. Flexibility and adaptability will be crucial to their success.

Environmental Security:

Meeting the environmental security challenge suggests that we will need to use our resources much more efficiently than we have done in the past. In turn, this suggests that production will have to intensify. The production of food and other land-based commodities will benefit from specialisation and scale. The production of landscape and certain other environmental features may benefit from more extensive production. This suggests a role for all sizes and intensities of farming businesses, provided they are profitable on the basis of their main outputs. At this time, unfortunately, most environmental outputs do not attract a sufficient return to make them profitable in their own right. Moreover, government attempts to regulate their provision are widely seen as burdens on the production of marketable goods or services. It is important to define clearly and understand properly the full extent and value of the environmental goods and services demanded by the public, and to identify those for which market solutions might be developed. Remaining demands should be seen as public goods the deliver of which would attract public payments that reflect the opportunity cost of their delivery.

Providing both food and environmental security at the same time will require new techniques and technologies that are yet to be developed. Government leadership in providing funding and coordination will be essential, as will developing a business environment that fosters, facilitates and rewards innovation.


The food and environmental security challenge is the greatest challenge for land managers of the first part of the 21st century. Meeting it means delivering at the same time higher productivity from the land and higher standards of environmental stewardship. While these challenges are global in scope and affect farmers and land managers everywhere, the analysis underlying Figure 2 suggest that Europe may be able to make a contribution to meeting those global challenges. What should a European response look like?

This is an historic challenge that will require a fundamental review of many of the attitudes and practices that have developed over the past decades; we need to reject past grievances and prejudices and agree that the challenge must be met! But how? There are a number of principles, features and themes that can guide this work:

1. New attitudes and priorities must be adopted in government: Farming and land management must become top priorities for government. To enable rural businesses to deliver the range of goods and services that only they can deliver, government must become a supportive partner. This means rejecting the belief in the necessity for central decision making, and embracing the flexibility and quality that only profitable businesses operating in properly functioning markets can deliver. Wherever markets cannot be found to deliver environmental outcomes – where public goods are demanded – public payments must be made that properly reflect the full opportunity cost of delivering those public goods. To do otherwise would be an erosion of private property rights, which might reduce food security and impair the market delivery of environmental goods or services.

2. We need a new Green Revolution: A critical, immediate priority for government is to provide leadership in the rapid development of new science and technology to provide the greater productivity and resource efficiency that are essential to meeting the food and environment security challenge. The budget required for this campaign of research and development, and the synergies possible through international cooperation, suggests that EU coordination and financing should be provided. National governments should also be encouraged to complement that work according to their ability to do so.

3. Profitable businesses are the essential foundation: Only profitable businesses can provide both the good and services from the land, and steward the environment. Enabling such private enterprises, and removing unnecessary obstacles to their development, must be a key objective. To have the flexibility to adapt to changing circumstances, especially given the expected implications of climate change, businesses will need
• A planning system that recognises the need for, and facilitates change. This means a planning regime that is more stable, and procedures that can deliver quicker, less expensive decisions
• A regulatory environment that doesn’t unnecessarily burden businesses – especially smaller businesses. All too often government and other authorities resort quickly to regulation in response to issues that arise. This is to show that they are “doing something”, give them some confidence that change will happen, and is seen as a cheap option, as little public money is usually required.
• Ongoing skills and training will be central aspects of successful businesses. With an increasing pace of change expected in the businesses options and opportunities confronting land managers, life-long skills development should become the norm for land managers.
• With increasing volatility, risk management will be essential to the viability and success of businesses. Certainly financial risk management should be central to land-based businesses, but all potential risks need to be understood and accounted for. Plant and animal disease, for example, can be expected to be increasingly prevalent as the climate changes.

4. Flexible, dynamic markets are of vital importance: All we can say with certainty is that the future will be more volatile and uncertain. We cannot predict when or where shortages or surpluses may occur. To ensure that decisions properly reflect the preferences of society, flexible and dynamic markets must play a leading role. To this end,
• Competition policy should take into account and accommodate the asymmetries in the food supply chain.
• Governments at both the national and European levels must recognise and exploit the essential contribution of international free trade and investment policy to diversifying supply and delivering global food security
• Essential public goods and services, such as supply chain infrastructure must be adequately provided and properly supported by government.
• Rural policies should not impair the ability of land managers to receive price signals clearly from the markets, nor restrict their ability to respond appropriately

5. New markets and new opportunities will arise: Too often the emphasis is placed on the risks of change rather than the opportunities presented. New markets for food, fuels, fibres, and pharmaceuticals will arise and need to be identified and accommodated as quickly as possible, while a more sophisticated view needs to be taken of the issues surrounding biotechnologies.

Markets have not developed for many of the environmental goods and services that are now increasingly in demand by the public. As a result many of these have been under-supplied by land managers, and governments have sought to introduce programmes of counter-measures, including regulation. All too often such programmes are inefficient uses of public funds, inconsistent with the range of other pressures on land-based businesses, and increasingly resisted rather than embraced by land managers.

Currently farmers receive significant sums of public money, for which a growing reporting obligation and interference by government in their land management practices and decisions appear to be the quid pro quo. The reduction, wherever possible, of such interference is important if private enterprise is to respond appropriately and efficiently to issues as they arise.

With the development of environmental markets, solutions to a growing range of environmental problems can be delivered without the need for heavy-handed government involvement or public funds. These include
• water quality,
• flood damage mitigation,
• natural habitat provision and species protection,
• carbon management.

A wide range of positive environmental outcomes can be provided by markets if the right conditions are brought about. There is no reason for the government to be responsible for delivering goods or services that the market can deliver. By the use of markets, the private sector can deliver things previously delivered by the government, thereby reducing the direct participation of the government in land management and providing important new business opportunities for land managers.

To enable markets to deliver these new public demands certain conditions must be brought about.
• Definition and stability of the desired outcomes is critical. It is important that the environmental goods or services demanded are closely defined.
• Property rights to the land resources must be recognised and enforced.
• Effective demand for the environmental outcomes must be introduced. This can be done by establishing caps and/or floors on externalities, as with carbon markets.

Blog at WordPress.com.