Massive Change in Store for Europe's Farms

March 19, 2001 -- Over the past few months, disease has ravaged European agriculture. Europe's collective response to the unfolding health crises has the potential to radically restructure its agricultural sector.

Mad cow disease, otherwise known as bovine spongiform encephalopathy, or BSE, is transmitted primarily through the use of "blood meal," a feed that contains the ground remains of other cattle. The United States banned the use of this "blood meal" in 1997. Europe got around to it only this year. BSE causes a variety of nervous system disorders in animals; scientists suspect BSE is linked to a fatal human illness, Creutzfeld-Jakob Disease.

Foot-and-mouth disease causes blisters in the mouth and hooves of cloven hoofed animals such as sheep, goats, deer and pigs and drastically reduces both meat and milk production. While it lacks the potential to harm humans, it can spread easily, via clothing, automobile tires, or even simply by wind. The virus' ability to spread makes it a far more serious economic threat than BSE.

Both recent outbreaks began in the United Kingdom. Cases of BSE have since spread throughout Europe. While this new foot-and-mouth outbreak has spread only to France, its appearance on the continent has prompted more than 90 countries to ban all EU animals and raw meat products. Others have added dairy products to the list, and some countries have gone so far as to ban all EU agricultural produce. Meanwhile, consumers are clamoring for new policies to protect them from new flareups of BSE, foot-and-mouth or any other pathogen lurking in Europe's animal pens.

Forcing Out Subsidies

It's abundantly clear, however, that Western Europe will be unable to foot the bill for these policies. The EU already spends 46 percent of its total budget on the CAP, or Common Agricultural Policy, a controversial system of supports, subsidies and incentives for European farms.

It's a testament to the political strength of farmers — particularly French farmers. The average full-time farmer in the EU receives subsidies amounting to $17,000 annually, according to the Organization for Economic Cooperation and Development.

Spending more is not an option. To begin with, the Union will have to radically reform — if not outright abolish — the CAP before expanding in 2004. What is now an extravagant expense will simply be unfeasible when 12 new members join EU ranks.

Since more farmers are in Poland than in all the current EU countries, maintaining the subsidy structure would bankrupt the Union. As it is, not all current members are supporters. Germany is particularly keen about abolishing the CAP, as Berlin pays far more into it than it takes out.

A Failed Back-Up Plan

Treaty requirements may force the CAP to collapse even earlier. The CAP agreement specifies that the European Union must purchase the beef from its farmers, should the price drop under 60 percent of a predetermined level. Faced with the prospect of having to purchase much of the Union's cattle due to plummeting demand, the Commission initiated a "purchase-for-destruction" scheme to round up, slaughter and dispose of 2 million head of cattle as a preemptive measure.

The hope was that this would be sufficient to drive prices back up and avoid a Union-wide buyout. Normally, the European Union would dispose of any excess by selling the livestock on the international market. But given the number of nations banning EU beef, the Union would be saddled with a huge amount of un-exportable product.

Moreover, this scheme is not likely to be enough to prop up prices. The Commission's plan is funded on the premise that demand will not drop more than 15 percent. The BSE outbreak has cut beef consumption by nearly a third across the Union, and up to 80 percent in parts of Germany. Foot-and-mouth is sure to further cut demand for beef and other meat products.

It has become readily apparent that the CAP's founding principle of "price stability" is simply too costly to maintain. The BSE bailout has already cost close to $1 billion, and foot-and-mouth is certain to cost far more in testing, disposal and foregone sales. Simply put, Europe will lack the resources to maintain the safeguards its citizens demand under the current system.

Shifting Resources

If Europe indeed wants "safer" food, it must radically revamp agricultural sector policies and procedures. Animal diseases are most likely to spread in the large herds that characterize Europe's heavily mechanized agriculture.

Their spread is aggravated by a system in which animals can be shipped thousands of miles over the course of their lives for fattening or slaughter.

A simpler system, with larger numbers of smaller herds should make outbreaks less common and easier to contain. But in animal husbandry profit margins are so slim that smaller herds are not generally economically viable.

The CAP will not be able to subsidize such a massive reorganization — it can't support the existing sector as it is. Therefore Europe will need to find a fresh source of subsidies, or radically restructure its agricultural sector to be much more profitable. The most likely scenario involves a combination of both.

With the CAP on the ropes, countries in which farmers are political heavyweights — France, Greece, Portugal and Spain — will probably elect to establish their own subsidy regimes. France is already planning its own bovine bailout.

This renationalization of subsidies should free up nearly $40 billion that European governments currently pour into the CAP. The burden of maintaining outdated, inefficient production systems will largely shift to the states that wish, for whatever reasons, to maintain them.

Salvation in the Green and the Old

But the few states willing to subsidize farmers will not be enough to feed the entire Union. And the others will have to find a way to make their farms more profitable. The most likely path is to go green.

Green foods command a premium at market, averaging an 80 percent premium over conventional equivalents. This dovetails nicely with growing sentiment against genetically modified foods. Germany, which has one of the most heavily mechanized agricultural sectors in the world, now has a green agriculture minister. The European Commission's agriculture commissioner is also organic friendly. Now, fear about food safety has boosted demand for alternate products.

But going green has problems. Crop yields are considerably lower and the entire process is far more labor intensive. It is difficult for mechanized farms to make the switch, since for a field to be certified organic it must be free of artificial fertilizers, herbicides, pesticides and genetically modified seeds for a period of twp-five years, depending upon the certifying authority. During the transition period, harvests are lower but cannot be sold as organic, making profits negligible. That's why less than 3 percent of Europe's food currently comes from organic sources, despite growing demand.

This reorganization is likely to have another effect: shifting much of Europe's agricultural production eastward. The Union is in the process of absorbing 12 states whose agricultural sectors are dominated by small, manpower-heavy farms that use relatively small amounts of chemical additives or machinery. Conventional wisdom maintains these farms are inefficient and a barrier to EU membership.

These antiquated farms could turn out to be Europe's saviors. Central European land has not been farmed as intensively as its Western European equivalent, according to the Economist Intelligence Unit. Reduced usage of chemical fertilizers and pesticides should make it easier for Central European farms to qualify for organic status.

This restructuring will be far from pleasant. But the shakeout will make the Union a far stronger entity as a result.

Peter Zeihan is an economic analyst for STRATFOR, the leading provider of global intelligence over the Internet.