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Analyzing the impact of recent EU decisions on tobacco production in Greece and other EU countries.

Nikos Allamanis

In April 2004, the European Union finalized its decisions on the future of its Common Market Organizations (CMO) in the sectors of tobacco, cotton and olive oil, thus completing the reform of the Common Agricultural Policy (CAP) for the period from 2006 to 2013. The decisions on tobacco can be summarized as follows:

• For the crops of 2006 to 2009, the governments of tobacco-producing member states can apply a regime of partial “decoupling” of the subsidies, keeping up to 60 percent of the amounts of the premiums as direct subsidies to production and giving at least 40 percent of these amounts as Single Farm Payments (SFPs) to the tobacco growers, irrespective of their production. The percentage of decoupling can be fixed at any figure between 40 and 100 percent, but has to be constant during the four-year period.

• From 2010, tobacco subsidies are to be totally decoupled (no direct premiums to production), but 50 percent of the total amounts are to be transferred to the second “pillar” of the EU agricultural budget to finance programs of rural development in the tobacco-producing regions, and only the remaining 50 percent will be given to the tobacco growers as SFPs, irrespective of whether they produce tobacco or not.

Before we attempt to analyze what these decisions may mean for the future of tobacco production in the EU, let us recall how we arrived at this point and review the underlying issues behind these decisions.

In 1992, the EU reformed the tobacco CMO, introducing subsidized production thresholds, individual farmer quotas and a compulsory contract regime. The targets then were to (1) limit production to a certain level (330,000 tons); (2) stabilize the budget (at 950 million euros) and (3) abolish intervention policies and the export restitution regime.

In 1996, the European Commission (EC) for the first time questioned whether the EU should “disengage” from supporting tobacco production and phase out premiums. The EC replied negatively to its own question and decided to maintain the 1992 regime, introducing two new policies—the buyback (offering the possibility to a grower of selling his quota to the EU and abandoning tobacco production) and the price-modulated “variable” part of the premium.

In May 2001, the EC presented, in the midst of the mad-cow disease crisis, to the Göteborg Summit a policy statement titled, “A Sustainable Europe for a Better World: A European Union Strategy for Sustainable Development.” Included in this document was the now-famous phrase, “Adapt the tobacco regime at the end of its review in 2002 so as to allow for the phasing out of tobacco subsidies.”

Claiming that Europe’s leaders had accepted this document in every detail, the EC went on to present in September 2001 its proposals for a definitive phasing out of the support on tobacco production. In the face of the tobacco industry’s fierce reaction, the commission retreated quickly and gave another three-year extension to the 1992 regime, covering crops 2002 to 2004.

In 2002, at the Doha convention of the World Trade Organization (WTO), the developed countries agreed for the first time to include agricultural support in the trade negotiations and promised to reduce the “trade-distorting” subsidies. As a result, the EC presented in January 2003 its proposals for the most radical changes in the CAP since the foundation of the European Economic Community in 1957, “aimed at moving away from a policy of price and production support to a more comprehensive policy of farmer income support.”

This principle is called “decoupling”; farmer income support is to be granted in the form of Single Farm Payments (SFPs), based on total subsidies received by each grower in the reference period 2000 to 2002 and to which various deductions will be applied (“modulation”). These payments are subject “to the respect of the statutory EU environmental and food safety standards, through cross-compliance, and rules of good agricultural and environmental condition.”

In June 2003, the Council of Ministers accepted in principle these proposals, but introduced, in order to address concerns related to the risk of extensive production abandonment, the notion of “partial decoupling,” which meant that a percentage of the support could still be granted on the basis of produced volumes. For every product a minimum decoupling percentage was fixed, and it was left to the national governments to decide the actual percentage, with the flexibility to move between this minimum and total decoupling.

The EC presented its proposals for the so-called Mediterranean products—olive oil, cotton and tobacco—in September 2003, and once again discriminated against tobacco on the grounds of the health issue, asking for a mandatory total decoupling of the tobacco subsidies with a view toward terminating tobacco cultivation. The tobacco industry again moved swiftly and strongly. It organized protests and secured support of the European Parliament, which resolved in March 2004 that no more than 30 percent of the tobacco subsidies should be decoupled. The industry also helped to create an alliance of five Ministers of Agriculture (from Italy, Spain, France, Greece and Portugal), resulting in the compromis described in the beginning of this article. The present regime was extended to also cover the 2005 crop.

It is worth examining the perspectives of those in favor of the decoupling policy—who are clearly obtaining a majority among European decisionmakers—and of those against it. The former argue that the new policy will satisfy the WTO’s Third World partners by drastically reducing trade-distorting agricultural subsidies, by rendering agricultural production to be market- and quality-oriented, and by putting the emphasis on health and environmental concerns rather than on volumes.

Opponents believe that, although the de-characterization of the subsidies to “non-trade-distorting” is being questioned in the WTO, the competitiveness of European agricultural production is being seriously threatened because the higher cost of labor due to superior working conditions will no longer be compensated, putting at risk millions of jobs related to the agricultural sector as well as the balanced and sustainable development of the rural areas, which will face the specter of desertification.

These are pertinent arguments when one tries to speculate what the future of tobacco production in the European Union may be. There is no doubt that production should be oriented toward the varieties and types most demanded in the international markets. But this has already been achieved to a large extent in the past six to seven years: The production of the least commercially viable varieties—nonclassical oriental and levantini—dropped from 29,200 tons in 1998 to a mere 3,650 tons in 2004; and that of dark air-cured varieties from 47,000 tons in 1998 to 22,100 tons in 2004. In fact, in 2004, 92 percent of all tobacco production in the EU consisted of the Virginia, burley and classical oriental varieties.

Thus, in the case of tobacco, structural adjustment of the production cannot be considered to be the target of the reform. The insistence of the EC on the total decoupling of the tobacco subsidies—which it finally achieved with a four-year transitional period—aims to eradicate tobacco production. The Commission is fully aware that in the absence of any direct support, the highly labor-intensive nature of cultivation and first processing will render European tobacco uncompetitive in the world markets.

This is claimed to be in line with the anti-smoking and anti-tobacco policies adopted by the EU, although no one can explain and justify the flagrant discrimination against producers of a raw material that is legally manufactured, imported, exported and consumed.

However, the conflict can no longer be characterized as a head-on collision between the tobacco industry and European authorities, as it could have been in the past. The offer of direct and unconditional income support to growers on record during the reference years, for a period extending to 2013, is producing a clear conflict of interest between the quotaholders and the remaining industry stakeholders. Indeed, one discovers here the main controversy of this new policy: It proposes to compensate for a period of time a grower in exchange for abandoning his productive activity and with more than the net income he was receiving from it, leaving all other actors—workers, suppliers, entrepreneurs—uncompensated, despite the fact that the tobacco premiums had been calculated in such a way as to cover in full the differences in cost between producing and processing tobaccos in the EU and importing them from other countries.

The ball is now in the Ministers’ court. They have until July 2005 to decide which decoupling percentage to apply. One point that Brussels needs to clarify immediately is whether this percentage can differ according to variety. Although everybody believed that this was the case, so that decoupling at different rates can be used to encourage or discourage the production according to the level of demand for each variety, EC services now insist that each country should fix a unique rate.

According to recent information, France and Germany will decide to fix the decoupling percentage at the minimum level of 40 percent, as this is the general consensus of all sectors of the industry. Spain is likely to do the same, but countries with marginal productions (such as Portugal, Belgium and Austria) will probably opt for total decoupling. In the two major producing countries, Italy and Greece, the situation is more complicated: Italy needs to apply different rates to different varieties and a general consensus has not yet been reached.

In Greece, the situation is totally different. Not only has a clear majority of tobacco growers’ cooperatives (groups) pronounced themselves in favor of total decoupling, but also the National Confederation of Agri-
cultural Cooperatives (PASEGES) has overturned its initial position, adopting the line that total decoupling is the best way to secure maximum funds for farmers’ income support in the years to come.

There are three distinct lines of thought among the growers. Some, discouraged by the continuous attacks on the sector and disappointed by the allegedly low prices, see the inevitabil-ity of the abandonment of tobacco cultivation and therefore prefer to receive the total amounts of the Single Farm Payments straightaway—to “take the money and run,” in other words. Virginia and burley growers, as well as growers of older age, tend to belong to this category. Others believe that the cultivation will continue anyway and that they will, through total decoupling, enhance their negotiating power and force the market to pay higher prices, at the same time admitting that they will have to put in maximum effort to improve the quality of their product. Others still, realizing that the market may be unable to offer the much higher prices needed to cover the costs of production, are afraid that they may be forced to quit and therefore see the need for partial decoupling. Growers of oriental varieties and those of younger age tend to belong in the two latter groups.

Dealers, meanwhile, point out that the consequences to Greece’s national economy of an eventual drastic reduction of tobacco production could be grave. High unemployment, negative balances of payments, underdevelopment of the rural areas and general lack of competitiveness of the economy being the most acute problems facing Greek society; the last thing any government should want is to see them aggravated.

It is difficult at this stage to make predictions. For Greece, maintaining substantial volumes of production of classical oriental—Basma, Katerini—seems to be more likely than maintaining Virginia or burley production. But much will depend on the political decisions. Partial decoupling at or near the minimum level will certainly secure the continuation of production without drastic reductions in quantities.

One concern in the minds of everyone is what will happen after 2010, when tobacco subsidies are to be cut by half and decoupled from production. This was one of the main issues discussed at the UNITAB (European Tobacco Growers Confederation) Congress that took place in Kavala, Greece, in October 2004. As with any other business, tobacco needs a long-term perspective, and in order to assure one, the efforts to amend these decisions and secure suitable arrangements that will allow the majority of these funds to be used in favor of the sector must start now, according to UNITAB’s resolution. The tobacco industry has shown in the past that it can fight for its survival effectively and it is ready to do so once more.