Lecture 5. Multifunctionality: a new rationale for support? Download lecture powerpoint slides What we want to learn about this topic What is meant by the European model of agriculture? Does agricultural multifunctionality justify continued support to the sector? Short introduction to the issues The European model of agriculture The idea of a distinctive European model of farming was propounded in an attempt to justify continuing support for European agriculture in the context of pressures from the EU's trading partners to eliminate agricultural support. The EMF is seen as a multi-functional agriculture, whose value lies not only in its food production but also its contribution to landscape preservation and the countryside. This is contrasted with the industrialised agricultural systems perceived to characterise US and Australian agriculture, for example. In this context, multifunctionality refers to any unpriced spillover benefits that are additional to food production. The claimed benefits range from environmental values, rural amenities, cultural values, rural employment and rural development and, according to some countries, food security. In a policy context, its importance is that it provides an additional justification to provide support to agricultural production with a view to enhancing these spillover benefits. Although the idea that agriculture has multifunctional outputs can be found in Commission documents on agriculture going back to the initial 1991 MacSharry reform proposal, the concept took formal shape as a defence of the European Model of Agriculture only in the late 1990s, for two reasons. First, there was need to provide a provide a new justification for society's payments to farmers, and particularly the direct payments introduced as compensation for reductions in price support in 1993. This justification relied less on making the case for agricultural exceptionalism because of the problems this created for farmers (price and income volatility, low farm incomes) and more on emphasising the potential loss of benefits to the wider society if farming was left to market forces (environmental losses, damage to wider rural society). Second, there was a concern to ensure that further negotiations in the WTO on agricultural trade liberalisation took into account these wider social benefits of agricultural production. Thus, in the Uruguay Round Agreement on Agriculture, WTO members agreed that, in negotiating the continuation of the agricultural policy reform process after 1999, that 'non-trade concerns' would be taken into account. Thus, the debate about multifunctionality was framed in the context where many WTO members saw it simply as another pretext for agricultural protection. The only official defence of multifunctionality by the Commission is made in a document submitted to the WTO in 1999. What is being captured by the idea of the multifunctionality of agriculture? The key elements are: the existence of multiple commodity and non-commodity outputs that are jointly produced by agriculture (the supply side). The importance of the joint production requirement is that the non-commodity output can only be produced as a by-product of farming activity (in the same way that wool can only be produced as a joint product with lamb or mutton). Thus farming activity should be supported in order to ensure the supply of the desired non-commodity output. the fact that some of these non-commodity outputs possess the characteristics of public goods and/or externalities with the result that markets for these goods do not exist or function poorly (the demand side). If the non-commodity benefits could be priced and sold separately, then farmers would be remunerated for them through normal market activity. Are the non-commodity outputs of agriculture really joint products? If jointness does not exist, then there is no particular agricultural policy issue to be explored. Non-agricultural provision is possible and the ideal provider is the one who can supply the commodity at the least cost. The maintenance of historic buildings in rural areas might be an example of weak or no jointness between farm production and a non-commodity output. Maintenance of these buildings, even where they are on farms, may be possible without any agricultural production activity. Rural viability. The link here with agricultural production is through the agricultural employment provided. But how close is the association between agricultural production and rural employment growth? On the one hand, agricultural employment continues to fall because of technological advances and farm consolidation. On the other hand, part-time farming and the diversification of farm income sources mean that agricultural employment is less central to rural development than in the past. Landscape. The beneficial consequences of agricultural production for landscape values is one of the most commonly cited of the multifunctional characteristics of agriculture, e.g. Burren landscape in Co Clare. But note that the impact of agriculture on landscape is not always positive. Intensive monoculture vs. extensive production on mountain pastures. Environmental quality. Often cited as a beneficial by-product of agricultural production, this impact can often be negative. However, some positive environmental externalities may be dependent on maintaining some level of agricultural production on specific lands or in specific regions, e.g. corncrake habitat on the Shannon callows. Food security. Often claimed to be a joint product with domestic agricultural production. But whether food security is enhanced by domestic food production needs to be evaluated. Relying on domestic production leaves a country vulnerable to climatic shocks while possibly reducing the availability of foreign supplies - in the absence of a consistent incentive to develop trade, potential exporters may simply not bother to develop a surplus for export. Food security may also have more to do with non-agricultural factors such as access, distribution and transport systems, suggesting that it is not simply a joint product with agricultural production. Evaluation. They key policy issue is the extent to which joint production creates opportunities for, or impediments to, policy targeting and decouping. Note in particular: even where jointness is shown to exist, does it depend on a particular type of farming system or technology, rather than just agricultural production per se, and to what extent can these relationships be changed if required? joint products may also be site or area-specific. There may be jointness between landscape or biodiversity values and the production of milk or beef in mountain areas, but these values do not exist in the case of intensive feedlots in lowland areas with cattle that never roam or graze. In this case there is jointness but only with respect to some part of production and not the totality. on the other hand, even if separation of the commodity and non-commodity outputs is technically feasible, there may be potential for what is called 'economies of scope'. This means that the joint production of two or more commodities is cheaper than separate production and obviously would convey an advantage on agricultural producers. Is there a market failure associated with the non-commodity output? Even where a joint non-commodity output has been identified, there is not necesarily a market failure. Supply from farmers may be sufficient to meet demand even if there is no explicit payment or transfer to farmers for this output. Merely identifying an externality is not in itself a justification for policy intervention. The gain to consumers from, for example, preserving the landscape amenity must be weighed against the cost of intervention. Are the joint products quasi-public goods? If the non-commodity outputs are private goods, there would be functioning markets, supply and demand would balance and there would be no need for policy intervention. However, even where joint production is identified and there is market failure, government provision is not necessarily the most efficient response. A spectrum exists between purely public and purely private goods, as in the case of 'open access resources', 'common property resources' or 'club goods', where different degrees of excludability or rivalry allow some possibility for voluntary provision, for the creation of markets, or for the charging of user fees. Summary Policy intervention may be justified where the non-commodity output is jointly produced and where it is relatively easy to change its link with commodity production, e.g. by changing farm practices or technology there is market failure non-governmental options such as market creation or voluntary provision have been exhausted. However, note the following criticisms agriculture produces negative as well as positive spillovers, yet advocates of multifunctionality do not net out or consider these negative effects using agricultural support in one country to attain multifunctional benefits lowers the benefits from agriculture, including multifunctional benefits, everywhere else. it is very unlikely that blanket measures that support the prices of specific commodities will ensure that the desired multiple outputs of agriculture are provided in the right places and in the right quantities or at reasonable cost to taxpayers and consumes. In this sense, multifunctionality provides an argument for improving targeting and decoupling of policy measures. Reading suggestions Multifunctionality Note that readings on multifunctionality fall into two groups: those which explore the meaning of the term (analytical) and those which explore the justification for the term to specific contexts (most often, environment, food security and rural development). Analytical The above account of multifunctionality draws on Cahill, C. and Shobayashi, M., 2000. 'The concept of multifunctionality of agriculture: results of OECD research', Proceedings of the Agricultural Economics Society of Ireland. There is a good summary of the OECD work on multifunctionality in OECD, 2001, Multifunctionality: An Analytical Framework: Highlights, 26pp. Applications Bohman, M. et al. 1999. The Use and Abuse of Multifunctionality, US Department of Agriculture Economic Resarch Service. Anderson, K., 2000, Agriculture's 'multifunctionality' and the WTO, The Australian Journal of Agricultural and Resource Economics 44, 3, 475-494. (only accessible to subscribers to Trinity College Library) Supplementary reading See the Commission's defence of multifunctionality in the context of the WTO agricultural negotiations. Read the Australian Bureau of Agricultural and Resource Economics, Multifunctionality: A Pretext for Protection, ABARE Current Issues paper 99.3, Canberra, ABARE, for a critical view. Guyomard, H. and Le Bris, K., 2003, Multifunctionality, Agricultural Trade and WTO negotiations: A Review of Interactions and Issues, ENARPRI Working Paper No. 4. (reviews the literature that multifunctional benefits are best supported through targeted policies rather than through trade policies) The Norwegian Ministry of Agriculture makes the case for the multifunctionality of Norwegian agriculture. Web resources European Series on Multifunctionality is a follow up of the French series "les cahiers de la multifonctionnalité", co-edited by CEMAGREF-INRA-CIRAD