Final Report for European Commission Submitted by Agra CEAS Consulting Ltd Telephone: *44 (0)1233 812181 Fax: *44 (0)1233 813309 E-mail: info@ceasc.com www.ceasc.com Job No2520/BDB/November 2011 EVALUATION OF THE EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY AND EGG SECTOR (AGRI-2010-EVAL-04) EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR i Contents S1. EXECUTIVE SUMMARY V 1. INTRODUCTION 1 2. DESCRIPTION OF THE AVIAN INFLUENZA OUTBREAK AND ITS IMPACT 3 2.1. THE OUTBREAK OF THE DISEASE OUTSIDE THE EU 3 2.2. THE OUTBREAK OF THE DISEASE INSIDE THE EU 5 2.3. THE PROCESS OF LOSS AND PERCEIVED LOSS OF CONSUMER CONFIDENCE 8 2.3.1. Reasons for the loss of consumer confidence 16 2.4. SUBSEQUENT MARKET DEVELOPMENTS 20 2.4.1. Consumption 20 2.4.2. Prices 22 2.4.3. Production 26 2.4.4. Income 28 2.4.5. Summary of market developments 30 2.4.6. Reasons for subsequent market development 31 2.5. RESPONSE TO THE MARKET DEVELOPMENTS 35 2.5.1. Industry response 35 2.5.2. National response 37 2.5.3. Initial EU response 42 3. THEORETICAL ANALYSIS OF THE EXCEPTIONAL MEASURES 47 3.1. POLICY FRAMEWORK 47 3.2. INTERVENTION LOGIC 49 3.3. THEORETICAL ANALYSIS OF INTERVENTION LOGIC 53 3.4. IMPLEMENTATION OF REGULATION (EC) NO 1010/2006 60 4. THEME 1: MARKET STABILITY 67 4.1. EVALUATION QUESTION 1: TO WHAT EXTENT WERE THE MEASURES EFFECTIVE IN RESTORING MARKET STABILITY IN THE POULTRY AND EGGS SECTOR? 67 4.1.1. Theoretical analysis 67 4.1.1. Methodology and analytical limitations 67 4.1.2. Evaluation criteria and indicators 68 4.1.3. Criteria 1: the Exceptional Measures were effective in restoring market stability to the poultry sector 69 4.1.4. Criteria 2: the Exceptional Measures were effective in restoring market stability to the egg sector . 83 4.2. EVALUATION QUESTION 2: TO WHAT EXTENT HAVE THE DIFFERENT WAYS OF IMPLEMENTATION OF THE EXCEPTIONAL MARKET SUPPORT MEASURES IN THE INDIVIDUAL MEMBER STATES INFLUENCED THEIR EFFECTIVENESS IN RESTORING MARKET STABILITY? . 89 4.2.1. Theoretical analysis 89 4.2.2. Methodology and analytical limitations 89 5. THEME 2: INCOME STABILITY 91 5.1. EVALUATION QUESTION 3: TO WHAT EXTENT WERE THE MEASURES EFFECTIVE IN STABILISING INCOME IN THE POULTRY AND EGGS SECTOR (FARMERS AND DOWNSTREAM)? 91 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR ii 5.1.1. Theoretical analysis 91 5.1.1. Methodology and analytical limitations 92 5.1.2. Evaluation criteria and indicators 93 5.1.3. Criteria 1: the recovery of income 93 5.1.4. Criteria 2: the Exceptional Measures were effective in stabilising incomes directly through the compensation provided 99 5.1.5. Criteria 3: the Exceptional Measures were effective in stabilising income indirectly through returning the market to balance and hence restoring prices 105 5.2. EVALUATION QUESTION 4: TO WHAT EXTENT HAVE THE DIFFERENT WAYS OF IMPLEMENTATION OF THE EXCEPTIONAL MEASURES IN THE INDIVIDUAL MEMBER STATES INFLUENCED THEIR EFFECTIVENESS IN MAINTAINING INCOME? 106 5.2.1. Theoretical analysis 106 5.2.2. Methodology and analytical limitations 107 5.2.3. Evaluation criteria and indicators 107 5.2.4. Criteria 1: suitability of the measures 108 5.2.5. Criteria 2: Timing of the measures 113 5.2.6. Criteria 3: application procedure and eligibility 117 5.2.7. Criteria 4: payment rates 124 6. THEME 3: EFFICIENCY, RELEVANCE AND COHERENCE 127 6.1. EVALUATION QUESTION 5: TO WHAT EXTENT HAVE THE MARKET DISRUPTIONS BEEN TACKLED EFFICIENTLY? 127 6.1.1. Theoretical analysis 127 6.1.2. Methodology and analytical limitations 128 6.1.3. Evaluation criteria and indicators 129 6.1.4. Criteria 1: the Exceptional Measures were efficient in terms of administrative burden 130 6.1.5. Criteria 2: the Exceptional Measures were efficient in terms of financing method 134 6.1.6. Criteria 3: the impacts arising from the Exceptional Measures in relation to inputs 136 6.2. EVALUATION QUESTION 6: TO WHAT EXTENT WERE THE MEASURES RELEVANT TO FULFIL THE OBJECTIVES OF THE CAP AND TO CREATE EUROPEAN ADDED VALUE? 139 6.2.1. Theoretical analysis 139 6.2.2. Methodology and analytical limitations 140 6.2.3. Evaluation criteria and indicators 141 6.2.4. Criteria 1: the Exceptional Measures were relevant to the objectives of the CAP 141 6.2.5. Criteria 2: the Exceptional Measures provided EU added value 146 6.2.6. The likely impact of Member States acting alone 147 6.3. EVALUATION QUESTION 7: TO WHAT EXTENT HAVE THE EXCEPTIONAL MARKET SUPPORT MEASURES BEEN COHERENT WITH OTHER MEASURES? 148 6.3.1. Theoretical analysis 148 6.3.2. Methodology and analytical limitations 149 6.3.3. Evaluation criteria and indicators 149 6.3.4. Criteria 1: the Exceptional Measures were coherent with other EU initiatives undertaken in response to the 2005/06 AI crisis 150 6.3.5. Criteria 2: the Exceptional Measures were coherent with private initiatives undertaken in response to the 2005/06 AI crisis 155 6.3.6. Criteria 3: the Exceptional Measures were coherent with national initiatives undertaken in response to the 2005/06 AI crisis 158 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR iii 6.4. EVALUATION QUESTION 8: TO WHAT EXTENT WERE THE MEASURES COHERENT WITH THE OVERALL CAP AND CAP REFORMS? 160 6.4.1. Theoretical analysis 160 6.4.2. Methodology and analytical limitations 160 6.4.3. Evaluation criteria and indicators 161 6.4.4. Criteria 1: the Exceptional Measures are coherent with the current CAP 161 6.4.5. Criteria 2: the Exceptional Measures are coherent with the likely direction of future CAP reform 165 7. THEME 4: LESSONS LEARNED 173 7.1. EVALUATION QUESTION 9: WHICH RECOMMENDATIONS CAN BE MADE ON THE BASIS OF THE EXPERIENCE WITH THE EXCEPTIONAL MARKET SUPPORT MEASURES FOR TACKLING SIMILAR CASES IN FUTURE? 173 7.1.1. Theoretical analysis 173 7.1.2. Methodology and analytical limitations 173 7.1.3. Lessons learned and recommendations 174 8. CONCLUSIONS AND RECOMMENDATIONS 181 8.1. JUDGEMENTS ON THEME 1: MARKET STABILITY 181 8.1.1. Effectiveness of the measures in restoring market stability 181 8.1.2. The impact of implementation on effectiveness in restoring market stability 181 8.2. JUDGEMENTS ON THEME 2: INCOME STABILITY 182 8.2.1. Effectiveness of the measures in stabilising income 182 8.2.2. The impact of implementation on effectiveness in maintaining income 182 8.3. JUDGEMENTS ON THEME 3: EFFICIENCY, RELEVANCE, COHERENCE 184 8.3.1. To what extent have the market disruptions been tackled efficiently 184 8.3.2. To what extent were the measures relevant to fulfil the objectives of the CAP and to create European added value 184 8.3.3. To what extent were the measures coherent with other measures 185 8.3.4. To what extent were the measures coherent with the overall CAP and CAP reforms 186 8.4. CONCLUSIONS AND RECOMMENDATIONS 188 8.4.1. Conclusions 188 8.4.2. Recommendations 189 9. REFERENCES 191 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR v S1. Executive Summary This study evaluates the impact of the exceptional market support measures in the poultry and egg sectors introduced in 2006 to deal with the market disturbances that originated from fear of Avian Influenza (AI) and the resulting confidence crisis. Severe market disturbances and a crisis of confidence occurred despite the absence of the disease among domestic birds in the EU; the crisis could therefore be considered a perceived crisis of confidence. The consumer fear of AI destabilised the whole production and trade chain. Data shows that the EU average weighted price of poultrymeat dropped by 17.3% between August 2005 and March 2006. Production also dropped by around 12.6% between November 2005 and February 2006, though this figure may have been affected by seasonality. Against a background of reduced demand and hence market instability, the industry took measures to reduce production. Some Member States also introduced national measures to assist the sectors. At the same time the European Commission increased the scope and rate of export refunds available within the poultry Common Market Organisation (CMO) to remove excess supply from the EU market. However, the combination of reduced demand in some Third Countries, and the introduction of bans on EU poultry and egg products in others following outbreaks of H5N1 within the EU restricted the impact of these measures on market stability. Because no regular measures were foreseen for these circumstances in the CMOs, the Commission amended Article 14 of the poultry and egg CMOs to allow the use of exceptional market support measures in the event of a drop in consumer confidence. This was the first time that the Commission had implemented market support measures due to a perceived lack of consumer confidence. A payment scheme was then established by the Commission in order to reduce supply and address the market disruption through Regulation (EC) No 1010/2006 which was adopted on July 3, 2006 and entered into force on May 11, 2006. The methodology for this evaluation included desk research and analysis; analysis of FADN data; literature review; online survey of Competent Authorities; interviews with Commission Services and key EU stakeholders; and, case studies in France, Greece, Hungary, Italy, the Netherlands, Poland and Spain. S1.1. Theme 1: Market stability The Exceptional Measures should have resulted in a reduction in supply of poultry, and to a much lesser extent, eggs by compensating producers for the removal of breeding stock, hatching eggs, day old chicks and pullets, and by compensating producers for the resulting lower levels of production. This reduction in supply should have restored the markets to stability. The recovery of prices in the poultry market began in March and markets returned to pre-crisis trends from mid-2006 with the exception of Third Country imports which remained below pre-crisis EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR vi levels until mid-2007. This suggests that supply was successfully reduced in the short-term without affecting the production potential of the EU industry. However, despite the rapid implementation of the Exceptional Measures, the timing was such that the industry cannot have made production decisions in late 2005 and early 2006 which reduced supply in the knowledge that these decisions would subsequently be supported by the EU. It is therefore only possible to conclude that the Exceptional Measures were not directly effective in restoring market stability to the poultry sector, although there may have been a rational expectations effect which had an indirect impact. That said it is possible to infer that had the measures been known to the industry at the time production decisions were taken, they would have been effective in reducing supply in combination with the other industry initiatives and national measures introduced. The Exceptional Measures were therefore correctly specified, but were simply announced too late. The Exceptional Measures were used very sparingly in the egg sector, but again the measures were too late to have had a direct impact, although there may have been a rational expectations effect. A necessary condition for national implementation of the Exceptional Measures to have had an impact on effectiveness is that the measures had been effective in restoring market stability. This could not have been the case directly, although there could have been an indirect impact, because the industry could not have known whether there would be measures when production decisions to reduce supply were taken, let alone the form that these measures would ultimately take. Different national implementation therefore had no impact on the effectiveness of the measures in this respect. S1.2. Theme 2: Income stability The Exceptional Measures, while too late to be a causal factor in the recovery of income, still had a positive impact on income when payments were made. The measures also had a positive impact on liquidity. Industry figures suggest that income losses throughout the production chain amounted to between €10 and €650 million depending on Member State during the crisis period, before later recovering with farmers in non-integrated systems considerably more impacted than those in integrated systems. In integrated systems it was the integrators who bore the brunt of income losses as they were committed to supply contracts. In non-integrated systems, the proportion of losses borne downstream varied, but was generally substantially lower than in integrated systems. The total support offered under the Exceptional Measures covered up to a third of estimated losses borne by the production, hatchery and breeding stages of the chain in some Member States, although not all this support was ultimately taken up. The range of measures on offer was generally in accordance with what had been requested by the industry and affected Member States, and hence they provided a suitable mechanism to support income. Though Commission Services provided a clear set of reasons as to why private storage was not offered, several stakeholders and Member States regarded its absence as an important omission. EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR vii The main limiting factor in terms of the impact of the measures on income appears to have been the eligibility criteria. In this regard it is very difficult to differentiate between the impact of EU and national level criteria (including documentary requirements). While the eligibility criteria may have had a negative impact on use of the measures in supporting income, it is clear that some kind of criteria are needed in order that producers who have taken the necessary measures are the beneficiaries and thereby to avoid deadweight. It is improbable that the measures had an indirect impact on income through returning the markets to balance because they did not have a causal impact on either production or prices. Several aspects of implementation were identified as potentially having an impact on the effectiveness of the measures. For some of these aspects it can be concluded that they may have impacted effectiveness, and for others not. Most Member States chose measures which could theoretically support income at all three points in the broiler production chain, although this does not ensure that the exact measures chosen were those requested by the Member State poultry sectors. It is difficult to draw conclusions about the suitability of measures chosen in Member States with integrated production chains. In Member States with non-integrated production chains, there is some evidence to suggest that the lack of coherence between the proportion of losses borne by a part of the chain and the proportion of money allocated to it had some negative impact on effectiveness for some parts of the production chain. Evidence suggests that the timing of implementation and payments in Member States had little direct impact on the effectiveness of the measures in supporting income at the time. However, this is partly because, despite rapid implementation by the Commission, the measures were made available at an EU level some time after the falls in producer income had taken place. As a result, money from the measures had a greater impact on capacity rebuilding and liquidity than in terms of strictly compensating for the falls in income dating from late 2005/early 2006. Consequently, given that the measures were available at EU level some time after the falls in income and took further time to implement at national level (hence the initial payment period was already significantly late), the requests for extension to payment periods cannot be considered to have had a further significant negative impact on the effectiveness of the measures in maintaining income. Indeed in some cases it allowed Member States to provide support to more beneficiaries. Some aspects of the application procedure and eligibility criteria at Member State level appear to have had an impact on effectiveness. Although it is difficult to isolate individual aspects, a common problem was a short application period, especially in combination with additional national eligibility criteria. The longer application period and more targeted awareness-raising in Italy and Greece, plus the ability of associations to complete applications on the behalf of applicants in Greece, may have positively impacted both take-up and the effectiveness of the measures. Whilst the application period was short in Hungary, the procedure was considered relatively simple, and assistance in EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR viii completing the application was provided, possibly explaining the reasonable level of take-up in Hungary. In Spain, the close collaboration with the industry appears to have been the key factor in ensuring the 100% utilisation of funds. Generally it has to be noted that the average up-take rate across the EU was rather low at 52% of available funds. The limited evidence on the impact of payment rates suggests that, with a few exceptions, rates chosen by Member States were appropriate. S1.3. Theme 3: Efficiency, relevance, coherence Evidence drawn from our interviews and survey suggests that the administrative burden of the measures was relatively low (0.2% of EU funds for the Commission and between 0.4% and 9.1% of Member State funds for national Competent Authorities). This implies that the measures were efficient in terms of administrative burden. Unfortunately it is not possible to corroborate this by comparing the implementation costs of the EU level measure to the implementation costs of industry and national measures due to a lack of data and differences in the nature of the measures. While it is not possible to reach a decisive judgement on the impact of the financing method (co- financing, and method of financing the Member State contribution) on efficiency, there is some evidence to suggest that co-financing may have delayed implementation in some Member States. That said, co-financing is generally seen as being preferable to solely national financing, although it is not without issues. There is merit in considering increasing the proportion of EU support in order to mitigate some of the problems in terms of Member State affordability. In terms of the relationship between inputs and outputs, evidence suggests that the measures were efficient. Support provided was a small percentage both of the total output of the poultry sector in 2006 (0.8%) and of estimated total losses (up to 10%). Despite the amount of support being comparatively small it did allow some producers to avoid bankruptcy and reduced liquidity problems for others. This implies that significant impacts were achieved with small amounts. Despite their comparatively fast introduction considering the absence of a legal base, the efficiency of the measures in this context was perceived to be limited by the issue of timing, though this was more connected to the lateness of the measures themselves than the lateness of payments under them. There is evidence to suggest that the measures were too late to help some producers, who had already made the decision to leave the sector, and were palliative for others. Finally, connected to the timing issue, the retrospective measures were perceived to correspond to the actions taken by producers (with the exception of private storage), and were coherent with each other. The measures can therefore be considered efficient in this respect. The measures within Regulation (EC) No 1010/2006 were relevant to the needs of the industry at the time. Support for private storage was considered by the industry and some Competent Authorities to be a missing measure. While the decision not to use private storage was based on the EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR ix fact that the CAP applies only up to the first transformation of products, a lack of cost-effectiveness and a move away from such measures in the 2003 CAP reform, the existence of support for private storage in other sectors does suggest that it would have had a role to play in the short-term. The retroactivity period of the Regulation generally fulfilled industry needs. While eligibility criteria may have imposed some restrictions on the relevance of the measures, it is difficult to differentiate between the general impact of EU and specific national level eligibility criteria. Furthermore it is recognised that criteria were necessary to effectively target support to recipients who had taken action to reduce production. With regard to the objectives of the CAP, the measures were both theoretically and practically relevant for the objective of ensuring a fair standard of living for farmers. The measures were theoretically relevant for the objective of stabilising markets during the crisis, though in practice they were not directly relevant due to the timing issue. However, because the action taken by farmers and later compensated for by the Exceptional Measures did work to stabilise the markets, it is clear that the measures would have been relevant had they been available in time to influence production decisions. As it was the measures were effective in ensuring the stability of the markets during the recovery phase. Similarly with regard to the objectives of assuring the availability of supplies and reasonable consumer prices, the actions taken by producers and later compensated for by the Exceptional Measures were relevant. With regard to the EU added value of the measures, an EU level response was appropriate given the EU-wide nature of the crisis. The menu method generally allowed a co-ordinated response while giving the Member States freedom to select appropriate measures, and this ultimately ensured that the response was more effective than if Member States had acted alone. The EU level response also avoided both the potential problem of compliance with State Aid rules and the potential for unfair competition between Member States. That said, it should be noted that differing ability/willingness to provide co-financing was itself a problem. While the EU level response was generally appropriate, timing was problematic. Providing a coordinated response required considerable time, and it would have been quicker had Member States acted alone as was seen in, for example, France and Greece. This was indeed corroborated by experiences in certain Member States such as Italy and Greece. It is also possible that the menu system, while providing Member States with choice, may have also reduced the degree of coordination where Member States chose to implement only a small proportion of the measures. However, one of the main achievements of the measures was that they avoided disturbance of the internal market through a co-ordinated EU level response, while maintaining long-term production capacity. Veterinary/preventative measures under which the EU sought to limit the extent of AI in the EU, were successful in that the impact of the disease on animal and human health was limited and consumer confidence was therefore protected from potential further decline. The Exceptional Measures are judged to have been coherent with the veterinary/preventative measures in that they [...]... tackled in the future by considering the above recommendations and their interactions in order to ensure the correct preparation for future crises across all sectors xiv EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR 1 Introduction This study evaluates the impact of the exceptional market support measures in the poultry and egg sectors introduced in 2006 to deal with the market disturbances... as the measures were relevant, they were also coherent Three further coherences with CAP x EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR principles were also identified: the focus up to the first point of transformation; compensation for the higher costs of EU production during a crisis; and, the solidarity principle in financing One incoherence, the use of such measures in an otherwise... within the poultry CMO to remove excess supply from the EU market However, the combination of reduced demand in Third Countries, and the introduction of bans on EU poultry and egg products by some Third Countries following outbreaks of H5N1 within the EU restricted the impact of these measures on market stability In order to address the problem of falling demand and oversupply, additional, coordinated... coordinated measures were needed at the EU level However, the CMOs for poultry and eggs were not originally drafted with provision to permit exceptional market support measures to be taken in the event of a sharp decline in consumer confidence 1 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR The Commission therefore proposed legislation to amend Article 14 of the poultry and egg CMOs... MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR 2 Description of the Avian Influenza outbreak and its impact This Chapter describes the outbreak of the disease outside the EU (section 2.1) and the outbreak within the EU (section 2.2) It then charts the process of the loss of consumer confidence (section 2.3) and the subsequent market developments (section 2.4) Finally, the industry, national and initial... after the second statement, in fact after the crisis of confidence had passed, and results might have been different had 11 France had the highest proportion of correct answers in terms of the safety of chickens (85%) and Poland the highest proportion of correct answers in terms of the safety of eggs (89%) amongst the EU-25 18 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR the research... 3 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR Figure 2.1: Spread of Avian Influenza outside the EU 2003-05 Source: World Organisation for Animal Health (2003-05) Disease Information weekly publication 4 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR 2.2 The outbreak of the disease inside the EU Figure 2.2 presents the evolution of first confirmed outbreaks of. .. health, was the main determinant in the loss of consumer confidence Consumer trust in the public institutions, and understanding of the information made available, are also likely to be factors in consumer confidence For example, the British Poultry Council explained that the good reputation of the UK Food Standards Agency and consumer trust in the main retailers were the main reasons why poultry sales... production and trade chain Exceptional Measures were taken because no regular measures were foreseen for these circumstances in the Common Market Organisations (CMOs) The H5N1 strain of the Avian Influenza virus originated in south-east Asia in 2003 and spread across the continent of Asia, finally reaching the EU borders (Turkey and Romania) in October 2005 In February 2006, the first outbreaks of the H5N1... Spread of Avian Influenza inside the EU 2006 Source: World Organisation for Animal Health (2006) Disease Information weekly publication 7 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY & EGGS SECTOR 2.3 The process of loss and perceived loss of consumer confidence Consumer confidence, and the fear of loss of consumer confidence in the production and trade chain, played a key role in the market . EVALUATION OF THE EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY AND EGG SECTOR (AGRI-2010-EVAL-04) EXCEPTIONAL MARKET SUPPORT MEASURES IN THE. THE MEASURES EFFECTIVE IN STABILISING INCOME IN THE POULTRY AND EGGS SECTOR (FARMERS AND DOWNSTREAM)? 91 EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY