Does the Nordic Aid Scheme Remain Relevant in Light of CAP Reform?

When Finland joined the EU in 1995, due to a national price support mechanism and import restrictions, Finnish agricultural prices were 40-60% above the corresponding market prices within the EU. Concern over the economic conditions for the farmers after accession resulted in a special aid agreement under article 142 of the Act of Accession, the so called ‘Nordic Aid’ for Finland and Sweden. Given the recent changes to the CAP instilled by the Health Check, I explore here whether the Nordic Aid Scheme can continue to be justified as a form of agricultural support.

Nordic Aid grants a “long-term national aid with a view to ensuring that agricultural activity is maintained in the northern regions”. The regions were determined by severe conditions for agriculture, such as low population density and the small share of agricultural land, and are situated to the north of the 62nd parallel. This special aid was granted in order to:

  • maintain traditional primary production and processing naturally suited to the climatic conditions of the regions concerned;
  • improve the structures for the production, marketing and processing of agricultural products;
  • facilitate the disposal of the said products;
  • ensure that the environment is protected and the countryside preserved.

The rationale for the scheme is based on natural handicap, such as climatic and topological conditions, and low population density. In Finland, the Nordic Aid scheme comprises payments for agriculture, horticulture and reindeer husbandry, transport aid for milk and meat, storage aid for horticultural products, wild berries and mushrooms, and aid for young farmers. It covers some 1.4 million hectares, which is 55.5% of the utilised agricultural area in Finland. In Sweden, Nordic Aid is granted for fewer agricultural products than in Finland: mainly for cow’s milk but also pigs, goats, eggs, soft fruits and vegetables. The aid is coupled to production.

Nordic Aid has contributed to maintaining agricultural land-use in the designated regions… [through support of] especially medium size farms.

An evaluation (a) conducted in 2007 revealed that Nordic Aid has contributed to maintaining agricultural land-use in the designated regions. It was particularly crucial to maintaining milk production – an agricultural activity best suited to Nordic conditions and the most important economically. Despite the support, however, production has been reducing in the northernmost sub-regions, and increasing in the more southern sub-regions - a general process driven by market forces. This spatial concentration and increased production volume is most evident in the pig and poultry sectors of Finland. The evaluation also suggested that without the Nordic Aid Scheme, the farm exit rate, currently at 3.5% annually in the designated regions, would have been higher since the Aid supported especially medium size farms. Also, existing economic modeling suggested that without the Aid, Finland would have switched from a net-exporter to a net-importer of dairy products.

[Nordic] Aid has contributed to the single, currently most adverse impact on biodiversity and environment [in Finland and Sweden] – the intensification of agricultural land-use in the regions which receive Nordic Aid.

The Nordic Aid Scheme does not explicitly include targeted environmental measures, but the evaluation claims that it indirectly "contributes to European agri-environmental programs and regulatory framework concerning the Nordic agricultural regions". The impact of Nordic Aid on maintaining mosaic and biodiversity value was found to be "negligible". However, Nordic Aid, in combination with investment support, has resulted in a greater area of intensive land use types (cereals and intensive grassland) at the expense of arable pasture and grazing lands. The latter fact points out to the fact that the Aid has contributed to the single, currently most adverse impact on biodiversity and environment – the intensification of agricultural land-use in the regions which receive Nordic Aid.

The Nordic Aid measures (e.g. the headage payments) are coupled to farm production. Though they were shown to be efficient in maintaining primary agricultural production, as compared to partially or fully decoupled arable land payments, the evaluation argued that decoupled support would be more transparent and efficient in fulfilling income support objectives. The result would have been a production sustained at a lower level, which would have been more sustainable in overall terms. However, since the purpose of the recent CAP reforms has been to increase market orientation there is a growing incoherency between the principles underlying Nordic Aid and the other CAP measures.

The Health Check of 2008 made further provisions towards market regulation of agricultural production, and the change most relevant for the Nordic region is the reduction in milk quotas. Without doubt, this will negatively affect the economic viability of small family farms in the Nordic region by shifting production to large farms within and outside the country (e.g. Estonia). The environmental impact of the change largely depends on the type of land-use which will replace dairy farming in the North, and the environmental performance of the large intensive dairy units (e.g. level of compliance with cross-compliance requirements, attention given to nutrient budgets). It is questionable that special support should be granted to activities aimed at the production of export commodities from places as remote as some Finnish farms, but it seems to be justified to support local activities serving local/regional markets, which otherwise would have to rely on imports, especially of such staples as milk.

It is clear now that, though the Aid supported agriculture as an important activity, it has not been able to maintain the vitality of local economies.

It is clear now that, though the Aid supported agriculture as an important activity, it has not been able to maintain the vitality of local economies. It is therefore imperative for other support schemes to be used to support the diversification of employment and production lines (such as tourism, bioenergy etc.) in the Nordic regions. The retention of some level of agricultural production should be aimed increasingly at overall sustainable land management and preserving the countryside with its cultural, landscape, and biodiversity outputs – all of which are the specific objectives of the Rural Development Programme and LFA support. The former is unlikely to achieve the multitude of sustainable land-use objectives set for it unless its funding is increased manifold either through modulation or a gradual transfer of funds from nationally funded support schemes such as Nordic Aid. Exclusive reliance on agri-environment support will be inadequate because of the inherent problem that the payments must be based on the "income forgone/cost incurred" formula. This means that activities which have been producing public goods and are not in need of change cannot be supported.

A question remains whether Nordic Aid, in its current form, is still justified, especially if it contrasts with the market-oriented logic behind the reformed CAP.

A question remains whether Nordic Aid, in its current form, is still justified, especially if it contrasts with the market-oriented logic behind the reformed CAP. It is true that the relevance of the special support package has remained in the Nordic regions since the obstacles to production there are of a permanent nature. Another question is whether Nordic Aid in its current form - coupled to production and commodity specific - remains the most efficient support mechanism for providing for the long-term sustainability of the region’s land-use. Arguably, farmers are given a higher level of flexibility in production lines and volumes, adjusted to demand, through the existing Single Payment and voluntary agreements under the Rural Development Programme.

Taking into account the difficult production and living environment in the North, the payments will have to be higher than those granted for similar activities elsewhere in Finland, if the important positive externalities of agriculture in these areas (cultural, landscape or biodiversity) are to be maintained. This can be achieved also from a special rate under the current Least Favoured Area (LFA) payments, which is based on exactly the same support logic as Nordic Aid. Here there is scope for fusion. The possibilities raised by Article 68 can be utilised further for providing a targeted headage aid for certain animals. Finally, the Rural Development Programme should be utilised to its full to promote the diversification of regional rural activities away from overdependence on the more uncompetitive forms of agricultural production.

(a) An Evaluation on the Impact of Nordic Aid schemes in Northern Finland and Sweden (2007) Agrifood Research Finland (MTT) and the Swedish Institute for Food and Agricultural Economics (SLI). Report for DG Agriculture and Rural Development and DG Economic Analyses and Evaluation.

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PUBLICATION DATE

16 Feb 2009

AUTHOR

Irina Herzon

FURTHER INFORMATION

Dr Irina Herzon is a Research Biologist at the Department of Applied Biology at the University of Helsinki, Finland. She is also Birdlife Finland’s Agricultural Advisor.


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