IFAJ Northern Dimension, Savonlinna, Finland, 9 September 2001

Challenges of Northern Dimension in the EU and WTO

Dr Kalevi Hemilä

Minister of Agriculture and Forestry

Ladies and gentlemen,

It is a great pleasure for me to speak in this 45th Annual Congress of International Federation of Agricultural Journalists. For my part I wish to welcome you all to Finland, and to Savonlinna, which is one of our most beautiful cities.

I have a very challenging task in trying to tell you about the special characteristics and circumstances of Finnish farming. I should do this in 45 minutes. Unfortunately, it seems that we have not managed to fully explain these issues in the Community in six years.

Finland, the northernmost agricultural country in the world

Finland is the most rural country in the European Union. As you have seen, it is characterised by numerous lakes and vast woodlands.

Finland is also the northernmost country in the world with diversified agricultural production. The long cold winter with a lot of snow and the short summer with abundant daylight provide the setting for farming. The unfavourable climate is a permanent handicap for Finnish agriculture.

From the south to the north Finland is more than 1,100 kilometres long, and thus the farming conditions vary considerably within the country. In Southern Finland the growing season is 170 days, but in the north it is only 110 days. In most parts of the EU the growing season is more than 250 days, and in the most favourable regions it lasts all through the year.

Owing to the northern location and short growing season, the northernmost limit for the cultivation of many plants lies in the Finnish territory. Wheat can only be grown in the southern parts of the country. The limit for growing the most common cereals in Finland, namely barley and oats, lies a few hundred kilometres further north, but even these cannot be cultivated in the northernmost parts of the country. Many more demanding and high-yielding crops, such as maize, cannot survive in Finland at all.

The Finns have learned to adapt to the short growing season and to take the maximum advantage of it, thanks to cold-resistant varieties bred specifically for the northern conditions and development of cultivation technology. Sowing is started in May, when the frost in the ground has melted and the land has dried. After the short and intensive summer period the crop is harvested in August-September, when the autumn rains often make harvesting difficult. Pasture season usually lasts from the beginning of June until the end of September, and feedstocks have to be replenished for the long indoor-feeding period.

The harsh climate and short growing season lead to extra costs that do not occur elsewhere. The time available for sowing and harvesting is very short. Thus the equipment used has to be efficient, and in relative terms, that is, per tonnes harvested, the Finnish farmers have to invest more in machinery than their colleagues in the south. The crop has to be artificially dried because its moisture content is still high at the time of harvesting. The animals need proper buildings with sufficient thermal insulation for the long winter.

There are positive aspects to the northern location as well. Finnish food is produced in a country where the soil, waters and air are pure. The cold winter clears the land of diseases and pests, and the short summer with a lot of daylight raises tasty vegetables and berries. Production animals are healthy and free from many animal diseases common in the other parts of Europe. The low stocking density, scattered location of livestock units, long distances and appropriate transfers of animals form a solid basis for the health and welfare of animals. Our stocking density (per total land area) is only 3 bovine animals per square kilometre. To compare, the EU average is 26, and the figure for Netherlands is as high as 99 animals per square kilometre.

Most of the arable land is located on lake and river shores, and this constitutes a significant environmental challenge for Finnish agriculture. Cultivation must be in harmony with waters that are highly susceptible to loading. Finnish farmers appreciate environmentally friendly production. In the programming period 2000-2006 agri-environmental support covers about 91 per cent of all farms and 96 per cent of the arable area. Thus we can say that practically all farmers have committed themselves to using environmentally friendly production practices.

Finnish farms are run by families, and there is very little hired labour. Instead, it is quite common that one or both of the spouses work outside the farm as well. In Finland almost all farms have some forest, and forest work can quite easily be adjusted to the farming routines: most of the cultivation is done during the summer, while forest work is done in winter. Farms also engage in various sideline industries. Machine contracting, farm tourism, fishing and fish farming as well as processing of foodstuffs and wood provide highly significant additional earnings to many farm families and diversify the rural areas and their industrial structure.

EU membership, special arrangements for Finland

The accession of Finland to the European Union brought a special arctic flavour to the highly diverse European agriculture. The common agricultural policy of the EU was originally based on the conditions for farming prevailing in Central and Southern Europe. Although some special arrangements were made for Finland in connection of the Treaty of Accession, the handicap due to the northern conditions was not and is still not adequately taken into account. The unfavourable natural conditions, farm structure dominated by small farms, and factors relating to the location and long distances lead to high production costs, which can only partly be covered by means of sales income from the market. Due to the unfavourable production conditions, the role of agricultural support is particularly important in Finland. In 2000 support accounted for 44 per cent of the total return on agriculture and horticulture (sales income+support).

In the most recent reform of the common agricultural policy, Agenda 2000, the principle that the preconditions for farming must be secured in all parts of the Union, including less-favoured farming areas, was ratified at all decision-making levels. In this connection the fact that Finland as a whole is a less-favoured farming region was recognised for the first time.

Future: enlargement of the EU, WTO negotiations, reform of the CAP

The main challenges for the Finnish and European agriculture during the next few years will be the enlargement of the Union, the next round of WTO negotiations and the further reform of the CAP.

Enlargement of the EU

In view of both European agriculture and the future development of the rural areas, the enlargement of the European Union by 12 Eastern and Central European countries is an enormous challenge, but it also opens up great opportunities. It would double the agricultural population and increase the area of farming land in the Union by two-fifths. The range of different kinds of rural areas would become even more varied than today, as the Union would extend from the Scottish moors to the Carpathian Mountains; from Lapland to the southern and eastern Mediterranean, to Malta and Cyprus.

But what will be the consequences of the enlargement in the rural regions of Europe? The rural population is decreasing rapidly in all parts of Europe, and the share of agricultural production in the gross domestic product (/GDP) is falling. The problems in the current Member States are similar, and yet very different.

There is a wide gap in the economic development between the new and old members, and there is no way the new members can catch up with the old ones in a short time. Before the Second World War the gross domestic product per person in Estonia and Finland was about the same, while today the GDP in Finland is more than double that in Estonia. There is a lot to catch up with, and this is going to take time.

In such a situation, how will it be possible to practise a common agricultural policy and develop the rural areas in the future Member States? Do we have to accept different kinds of solutions for the new members, reduce the common features of agricultural policy, or transfer enormous amounts of financial resources from the current Member States to the new ones?

The European Union constitutes a single internal market, and no one wishes to question the free movement of goods or production factors, whether capital or labour force. Thus the conditions for the free movement of goods, including the common rules for veterinary and phytosanitary issues and hygiene, have to be implemented in the candidate countries more rapidly than would happen as a result of market pressure. Inputs into these issues are also going to improve the competitiveness of the products. Temporary restrictions relating to other issues - transitional periods - are a political question to be solved at the negotiations.

The starting points of the Union are the same as in the previous membership negotiations. The candidate countries will have to accept the Community rules, acquis communautaire, and no derogation will be allowed. In certain cases, however, transitional periods - concerning both the Union and the applicants - may be possible. It should be noted that the common agricultural policy has proven a surprisingly viable and versatile construction, capable of responding to new challenges both in Europe and in the world trade. Thus I am convinced that the enlargement is not going to undermine the need for or principles of the common agricultural policy, even if in the future it will be implemented in a much more extensive and demanding context than today.

WTO negotiations

The Ministerial Conference of the WTO in Qatar in November will decide whether the new round of negotiations can be started on a large scale or not. If no decision to start the comprehensive round of negotiations can be reached, the termination of the Peace Clause at the end of 2003 would expose many of the agricultural support schemes of the EU to the threat of being taken to the WTO panel. If the comprehensive round is started, the probable result will be, as in the Uruguay round, a reduction in the use of export subsidies, tightening of the rules for internal support and lowering of the border protection.

In any case, the WTO negotiations, together with bilateral trade agreements and the 'Everything but arms' decision, will increase pressure on the internal market of the EU and make it necessary to again review the rules of the CAP.

If the reductions based on commitments agreed on in the Uruguay round are simply continued, it will still be possible to operate at the present support structure on the Community level. However, should any decisions be made on larger cuts or elimination of the export subsidies, the Community will have to undergo deeper reforms, especially in sectors where the gap between the EU prices and world market prices is still wide (for example milk, rice and sugar).

In connection with the Agenda 2000 reform a new concept was designed to describe European farming and ways of socially acceptable farming practices. This concept, called the European model of agriculture, was recognised on all levels of the decision making process. It includes the idea of the multifunctional role of agriculture. It means that, besides food production, agriculture is highly important for maintaining the viability of rural areas and rural environments. Finnish agriculture, which is based on family farms and the principle of sustainable development, is well in line with these objectives. The EU has agreed to keep on highlighting this issue in the upcoming WTO negotiations.

Another main objective of the EU is to defend the blue box. If the blue box cannot be retained, the support paid by the Community would have to be changed into green support, or direct support should be gradually reduced. This would be problematic especially in areas where the yields are low and the production costs are high, such as Finland. I sincerely hope that the Community will find ways and means to solve this problem. Otherwise the objective of the Luxembourg Summit, namely maintaining agriculture in all areas of the Union, is in grave danger.

Reform of the CAP

Before Finland became a member of the EU, our price level was well above the EU level. In connection with the accession the Finnish producer prices were lowered from 30 to 65 per cent, and the prices were further reduced by the Agenda 2000 decisions. In areas where productivity is weak and production costs high we are approaching the limit where the income from the market is not enough to cover even the variable costs for the farmer. Thus there is the risk that the motivation of farmers to produce high quality raw materials may disappear. We do not want to create a CAP that encourages farmers to cultivate in the cheapest possible way in order to only collect the support and without due attention to the quality of the products.

The problems relating to CAP are well-known, and recently they have been subject to a wide public discussion. The problems include oversupply in certain commodities, animal health and welfare issues, recurring food crises - I'm sure you are all familiar with these. But from the Finnish point of view, there is a problem that is even more fundamental but has not been discussed in the public arena. The CAP does not adequately take into account the natural differences in competitiveness between different regions of the Union. For instance, direct support for arable crops is linked to a historical reference yield, which means that the support level is the highest in areas with the best yields and, accordingly, support is the lowest in the most handicapped areas. Thus the less favoured areas are punished twice, first by the nature and then by the system, and they are not given a fair chance to compete on the single market.

I am of the opinion that the common agricultural policy should take the special characteristics of agriculture in less favoured areas better into account. I believe that the common agricultural policy should be developed in such a way that more attention is paid to compensating for the differences in competitiveness due to natural conditions. This would make the support more readily acceptable in international trade negotiations, and the outcome would be more suitable as the new common policy of the enlarged union than the present direct support. This would also be in harmony with the cohesion objective of the Community.

The main objective of the Agenda 2000 reforms was to create competitive agriculture, which would also respond to the needs of society concerning sustainable development and viability of the rural areas. This laid the foundations for the second pillar of the agricultural policy in connection with Agenda 2000. Also for Finland the agri-environmental programmes and support for less favoured areas are of primary importance.

At the moment it seems clear that all future reforms must be realised within the very tight financial framework decided at the Berlin European Council. Therefore, reforms with wider implications are not likely to be decided in the coming mid-term review process. The time for these will come in connection with the new financial framework to be drafted by the next Commission.

There has already been some discussion concerning the financial arrangements of the CAP. Modulation and degressivity have been put forward as solutions if in the mid-term review process it becomes evident that savings are needed to fund further reforms or increased spending in rural development. Both of these methods are problematic for Finland.

Modulation offers opportunities for increasing the resources for rural development in countries where natural conditions for practising agriculture are favourable and where the level of direct support is high. In this sense, the idea of compulsory modulation on the Member State level conflicts with the basic cornerstones of rural development. Modulation on the European level would be a better alternative, in other words, reduction of direct support and use of the savings through the Community funds for rural development. If a decision on compulsory modulation is taken, it should be possible to implement this by using the support ceiling model, which means that support would be cut only for the part of the largest farms.

Degressivity of direct support would also be very difficult to accept in Finland. As we have already seen, less favoured areas receive less community support than more favourable areas. Should this support be further reduced, the continuation of farming would be seriously endangered in these areas.

The recent food crises have incorporated consumer concerns to the agricultural decision making with new weight. Regaining consumer confidence in European food production is perhaps the most important task for the agricultural policy makers at present. We must make sure that European agriculture produces safe, high quality products, whether organic or conventional, which the consumers demand and appreciate. To be able to provide them, farming must remain profitable and rural areas viable.

Thank you.

Kalevi Hemilä

Minister of Agriculture and Forestry

Minister: 1995-

Ph.D. (Agricultural Economics)

Age: 48 years

Minister Hemilä has served as Director General of the National Board of Agriculture (1986-1992), Director General/International Affairs in the Ministry of Agriculture and Forestry (1992-1999) and Counsellor for Agriculture, Fisheries and Forestry in Permanent Representation of Finland to the EU (1993-1995). He is currently on leave from the post of Secretary General of the Ministry of Agriculture and Forestry.

Marital status: married

Hobbies: horses, hunting, fishing, golf