EVALUATION OF THE EXCEPTIONAL MARKET SUPPORT MEASURES IN THE POULTRY AND EGG SECTOR (AGRI-2010-EVAL-04) pptx

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 o

Final Report for

European Commission

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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)

Contents

S1 EXECUTIVE SUMMARY V

1 INTRODUCTION 1

2 DESCRIPTION OF THE AVIAN INFLUENZA OUTBREAK AND ITS IMPACT 3

2.1 T HE OUTBREAK OF THE DISEASE OUTSIDE THE EU 3

2.2 T HE OUTBREAK OF THE DISEASE INSIDE THE EU 5

2.3 T HE PROCESS OF LOSS AND PERCEIVED LOSS OF CONSUMER CONFIDENCE 8

2.3.1 Reasons for the loss of consumer confidence 16

2.4 S UBSEQUENT 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 R ESPONSE 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 P OLICY FRAMEWORK 47

3.2 I NTERVENTION LOGIC 49

3.3 T HEORETICAL ANALYSIS OF INTERVENTION LOGIC 53

3.4 I MPLEMENTATION OF R EGULATION (EC) N O 1010/2006 60

4 THEME 1: MARKET STABILITY 67

4.1 E VALUATION Q UESTION 1: T O 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 E VALUATION Q UESTION 2: T O WHAT EXTENT HAVE THE DIFFERENT WAYS OF IMPLEMENTATION OF THE EXCEPTIONAL MARKET SUPPORT MEASURES IN THE INDIVIDUAL M EMBER S TATES 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 E VALUATION Q UESTION 3: T O WHAT EXTENT WERE THE MEASURES EFFECTIVE IN STABILISING INCOME IN THE POULTRY AND EGGS SECTOR ( FARMERS AND DOWNSTREAM )? 91

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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 E VALUATION Q UESTION 4: T O WHAT EXTENT HAVE THE DIFFERENT WAYS OF IMPLEMENTATION OF THE EXCEPTIONAL MEASURES IN THE INDIVIDUAL M EMBER S TATES 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 E VALUATION Q UESTION 5: T O 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 E VALUATION Q UESTION 6: T O WHAT EXTENT WERE THE MEASURES RELEVANT TO FULFIL THE OBJECTIVES OF THE CAP AND TO CREATE E UROPEAN 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 E VALUATION Q UESTION 7: T O 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

6.4 E VALUATION Q UESTION 8: T O WHAT EXTENT WERE THE MEASURES COHERENT WITH THE OVERALL CAP AND CAP REFORMS ?

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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 E VALUATION Q UESTION 9: W HICH 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 J UDGEMENTS ON T HEME 1: M ARKET 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 J UDGEMENTS ON T HEME 2: I NCOME 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 J UDGEMENTS ON T HEME 3: E FFICIENCY , 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 C ONCLUSIONS AND RECOMMENDATIONS 188

8.4.1 Conclusions 188

8.4.2 Recommendations 189

9 REFERENCES 191

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

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

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

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

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

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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

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 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

(co-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

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

The amendment of the agricultural products Regulation by Regulation (EC) No 1022/2006 added a provision to allow the promotion of conventional poultry meat products as a direct consequence of the decline in consumer confidence The Exceptional Measures were coherent with this promotion initiative in that they addressed the supply-side of the problem through decreasing production while Regulation (EC) No 1022/2006 addressed the demand-side of the problem by allowing initiatives to boost consumption

However, our analysis of communication undertaken at the time of the AI crisis reveals that this did not help to alleviate consumer concerns and therefore did not help to rebuild consumer confidence There was therefore little coherence with the Exceptional Measures That said, it is clear that the incoherence stemmed solely from the communication side

Largely because the Exceptional Measures provide retrospective support for measure already taken

by the industry there is a high degree of coherence between them The only aspect of incoherence was the absence of support for storage measures or another mechanism to remove immediate supply Even in this case the fact that the industry did freeze and store poultry meat, or look for alternative outlets, meant that together industry actions and Exceptional Measures provided a coherent response

Most Member States did not implement national measures in response to the 2005/06 AI crisis However, where they were used (mainly in France, where they were financially substantial, and Greece) national measures tended to focus more on communication and on supporting income to assist the maintenance of future production potential The Exceptional Measures were therefore coherent with this wider approach beyond reductions in production The fact that national measures were not widely used, and that the measures which were used differed, can be considered an argument for a Community level response to avoid the potential for unfair competition

The Exceptional Measures are therefore judged to have been generally coherent with other measures taken to address the 2005/06 AI crisis at the EU, national and industry levels

It has been concluded that the measures were relevant to the objectives of the CAP Using the definitions of “relevance” and “coherence” from the terms of reference, it can be concluded that as the measures were relevant, they were also coherent Three further coherences with CAP

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 light CMO, was also identified

Exceptional Measures were considered to be an effective instrument for a crisis, however, there is currently no definition of “crisis” or “exceptional” In taking a safety net approach and using such measures, definitions could be useful, as would be sufficient data to enable market monitoring The absence of communication measures from Regulation (EC) No 1010/2006 is considered coherent with the CAP

Some issues of coherence with wider EU objectives were identified The Exceptional Measures were not considered incoherent with EU animal welfare policy, as the definition of animal welfare focuses

on respecting the sentience of animals rather than ethical issues per se However, it should be noted

that the motivation presented for the measures and the nature of the measures themselves could play a role in their acceptance From an animal welfare point of view, if such measures were to be taken again it would be important that a suitable contingency plan is in place (in accordance with Regulation (EC) No 1099/2009) so that the sentience of animals be respected at the time of slaughter With regard to trade, Exceptional Measures are not popular with trade partners (and in the case of consumer subsidies, they are unpopular with some Member States as well) More widespread use of similar measures would require the EU to do what it could to follow WTO rules

DG Trade would have to be involved in the comitology process if such measures were considered likely to have a trade impact Finally, there is currently incoherence across sectors due to the existence of measures or legal bases in some sectors and their absence in others

Past reforms to the CAP have led to a more market orientated approach which places greater responsibility on the producer to manage risk The use of Exceptional Measures as a safety net is considered coherent with this change in emphasis However, the timing of the measures limited the ability of producers to self-regulate and caused the measures to be palliative rather than preventative (the reverse of other Pillar 1 measures)

The Lisbon Treaty has changed the way in which the Commission adopts implementing legislation; this in turn will change the way in which the Commission could introduce Exceptional Measures in a future crisis It follows from this evaluation that speed and flexibility are key

The markets recovered from the 2005/06 AI crisis by mid-2006 This recovery was partly based on the actions taken by the industry from late 2005 onwards, which, in the case of actions to reduce future production began to have an impact in early 2006, and was also influenced by the national measures introduced in the minority of Member States that did so However, the proximate cause

of recovery was most likely the reduction of media interest in the AI story which allowed consumer

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confidence in poultry meat to return The Exceptional Measures, which provided retrospective support for the actions taken by the industry to reduce production, were highly relevant to needs, and would in theory have played an important role in returning the market to stability However, the Exceptional Measures were not announced until July 2006 and the earliest that the industry could reasonably have been aware of the exact detail of the measures was June 2006 following discussions

on the draft Regulation Given that the recovery started in March 2006, it is therefore impossible to conclude that the Exceptional Measures had a direct causal impact in terms of returning the markets

to stability, although the expectation that the Commission was to provide some form of assistance may have had an indirect impact

Payments under the Exceptional Measures were made from late September 2006 to the end of May

2007, with the main payment period falling in late 2006/early 2007 Payments were therefore made too late to be a direct causal factor in the recovery of income, although again the expectation of some form of support may have been indirectly beneficial However, the support did have a clear positive impact on income when the payments were made and this would have assisted producers in meeting rising demand as consumer confidence returned

Clearly there were some substantial delays between the publication of Regulation (EC) No 1010/2006 in July 2006 and release of funds and this stems from the requirement for Member States

to implement and administer the measures However, given that the payments would already have fallen after the period of immediate crisis even if payments had been instantaneous on publication of the Regulation, this is not considered to be significant

The administrative burden of the Exceptional Measures was low for both the European Commission and the Member States, though the burden on beneficiaries was variable depending on the documentary requirements imposed by Member States Although the amount of support disbursed was relatively small, the impact in terms of boosting income was considered useful and helped to maintain the EU production base That said, efficiency was obviously compromised by the fact that the measures came to late to have had a causal impact on production-reducing decisions

The Exceptional Measures were highly relevant to the needs of the industry and were relevant to the CAP objectives of maintaining a fair standard of living for producers and assuring the availability of supplies/reasonable prices for consumers in the post-crisis recovery period Had the measures been available in time, they would also have been relevant to the CAP objective of stabilising the market during the crisis; as it was, they were effective in ensuring the stability of markets during the recovery phase The measures were also relevant to the TFEU objective of maintaining the internal market (Article 38) European added value was created through acting in a coordinated fashion while the subsidiarity principle was respected by allowing Member States to choose which measures, if any, they wanted to implement

The Exceptional Measures were coherent with other measures taken at the EU level, including veterinary/preventative measures, promotional initiatives and the use of export refunds Coherence

with respect to export refunds was reduced somewhat by the absence of short-term support for a private storage measure The main failing in response to the crisis was an incoherent and at times unhelpful approach to communication

Coherence with industry actions was high because the Exceptional Measures were based on the industry response, as was coherence with national measures where these were used which tended to focus on more general means of supporting income rather than specifically on measures to reduce production

Finally, the Exceptional Measures were considered to have been coherent with the CAP in that they focused on the production chain up to the first point of transformation, provided compensation for higher costs of EU production during a crisis and adhered to the solidarity principle through the use

of co-financing The Exceptional Measures also fitted well within the general direction of CAP reform in that they acted as a safety net for producers specifically affected by the crisis rather than as

a more structural general intervention

The Commission should give serious consideration to the issue of timing in order to assure the speedy deployment of future exceptional measures, more specifically: (1) to whether the decision to take action and the background work can be further streamlined; (2) to whether legal bases can be introduced during “peace time” to avoid delays during crises; and, (3) the quickest way in which measures could be introduced within the framework of the decision process under Articles 290 and 291 of the Lisbon Treaty

Any future use of Exceptional Measures should be harmonised by specifying the implementing procedure very carefully in the Regulation in order to minimise the mechanisms or regulatory processes that Member States have to add themselves Consideration should be given to whether implementing rules should be specified individually by Member State to ensure that differences in the legislative environment can be addressed

The industry should be fully consulted on the adequacy of policy response and method of implementation

The use of additional eligibility criteria and overly stringent documentation requirements should

be discouraged

In any future use of similar measures Member States should be encouraged to promote their availability through channels which intended beneficiaries might reasonably be expected to be aware of and to facilitate the submission of applications through simple procedures and appropriate application windows

Consideration should be given to increasing the proportion of EU funding in order to reduce the risk that some Member States will be reluctant to provide co-financing

A common approach at the EU level should be aimed for in any future crisis to avoid distortions

of the Internal Market

Promotional measures should be offered by the EU to help with the recovery of demand following a crisis, and awareness of the availability of these measures among Member States and the industry should be raised The Commission should also give thought to how promotional measure can be introduced quickly, for example through including a provision for sectors exiting

a crisis in the promotion regulation

Consideration should be given during the CAP reform process to including the provision to take exceptional measures across all commodity regimes and agricultural sectors

The Commission should carry out a review of data availability in the agricultural sector against internal monitoring and potential evaluation needs

If similar measures are to be used in the future, contemporary and suitable high frequency data

on consumption should be obtained by the Commission to ensure that these are available for evaluations which may take place some years later

Data on production, stocks and income should be collected through the inclusion of agriculture

in the monthly EC Business and Consumers Survey

Consideration should be given to how similar crises can be effectively 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

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 that originated from fear of Avian Influenza 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 In some Member States, for example, Italy, the consumption of whole chicken decreased drastically in the period between November 2005 and March 2006 The consumer fear of Avian Influenza destabilised the whole 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 virus were reported on EU territory – firstly among wild birds, and later only sporadic cases among domestic poultry

The virus was being discussed in the European media before the H5N1 strain arrived in countries bordering the EU and outbreaks were reported in neighbouring Romania and Turkey in October

2005, media coverage increased Inconclusive statements about the risks of the H5N1 strain were widely reported in the media and caused a degree of confusion among consumers The outbreaks in neighbouring countries, the media coverage and inconclusive statements on food safety affected consumer confidence and consumption of poultry meat and (to a lesser extent) egg products declined in some Member States Although consumer confidence recovered to some extent towards the end of 2005, outbreaks in the EU itself in February 2006 once more affected consumer confidence and the consumption of poultry (and again to a lesser extent) egg products declined once more

Against this background of reduced demand (and hence market instability), the industry took measures to reduce production Some Member States, for example, France, also introduced national measures to assist poultry and egg producers At the same time the European Commission increased the scope and payment of export refunds available 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 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

2

The Commission therefore proposed legislation to amend Article 14 of the poultry and egg CMOs (Council Regulation (EC) No 679/2006) 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

This evaluation was carried out by Agra CEAS Consulting, in conjunction with LEI Wageningen, between December 2010 and July 2011 The methodology included desk research and analysis; analysis of FADN data; literature review; online survey of Competent Authorities; exploratory and depth interviews with Commission Services and key EU stakeholders; and, case studies in France (Pascale Magdelaine, ITAVI), Greece (Professor Sophia Efstratoglou and Dr Athanasios Pappas, Agricultural University of Athens), Hungary (Dr Levente Nyárs, Agricultural Economics Research Institute), Italy (Dr Alberico Loi and Dr Enrica Gentile, Areté srl), the Netherlands (LEI Wageningen), Poland (Dr Grzegorz Dybowski and Dr Mira Kobuszynska) and Spain (Agra CEAS Consulting)

This Preliminary Final Report is structured as follows

Chapter 2 provides a description of the Avian Influenza outbreak, its impact and measures taken

to deal with the subsequent market developments

Chapter 3 provides a theoretical analysis of Regulation (EC) No 1010/2006 including its place within the wider policy framework and the intervention logic This Chapter also sets out the implementation of Regulation (EC) No 1010/2006

The Evaluation Questions specified in the terms of reference are grouped under four evaluation themes The first is concerned with market stability (Chapter 4), the second with income stability (Chapter 1), the third with efficiency, relevance and coherence (Chapter 6) with the fourth encompassing lessons learned (Chapter 7)

Conclusions and recommendations are offered in Chapter 8

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

EU response to the market developments is elaborated (section 2.5) This Chapter therefore sets the scene for the introduction of the Exceptional Measures

2.1 The outbreak of the disease outside the EU

The spread of the H5N1 strain of the Avian Influenza virus originated in south east Asia in 2003 and began its spread to Europe in 2005 (European Commission, 2006c)

Figure 2.1 shows that between December 2003 and February 2004 eight countries in East and Southeast Asia reported outbreaks of highly pathogenic Avian Influenza On December 16, 2003, South Korea became the first country to report two outbreaks of Avian Influenza A (H5N1) in domestic poultry Two subsequent outbreaks of the H5N1 virus were reported in separate southern regions of Vietnam (January 8, 2004), one on a single farm in Japan (January 12), one in Thailand (January 23), and also in Cambodia (January 24) On January 27, five outbreaks were confirmed in the Guangxi Zhuang Autonomous Region of China and one in Laos, while on February

2, 127 outbreaks were reported in domestic poultry in Indonesia Despite control measures, reports

of H5N1 infections continued with Malaysia reporting an outbreak in a flock of domestic chickens on August 19 By the end of 2005, nine countries were affected by the H5N1 virus

Outbreaks in migratory birds were reported in western regions of China in 2005 and the spread of the H5N1 strain continued into Russia (23 July, 2005), making this the first European country to report a discovery of H5N1 infection in domestic poultry Subsequently, an outbreak was reported

in domestic poultry in Kazakhstan (July 29), and 89 migratory birds were found dead as a result of H5N1 in two northern regions of Mongolia (August 10) From October 2005 the virus spread further west and discoveries of H5N1 infections were reported in poultry in Turkey (October 6), Romania (October 7) and Ukraine (December 2) and the virus was isolated from wild swans in a laboratory in Croatia (October 21)

The first humans to be affected by Avian Influenza H5N1 were in Hong Kong in 1997, with another two human cases in the same city in February 2003 Subsequent transmissions to humans were confirmed in Vietnam and Thailand in January 2004 As of December 2008 there were 391 human cases of H5N1 Avian Influenza reported from fifteen countries including Azerbaijan, Bangladesh, Cambodia, China, Djibouti, Egypt, Indonesia, Iraq, Laos, Myanmar, Nigeria, Pakistan, Thailand, Turkey and Vietnam (WHO, 2008)

Figure 2.1: Spread of Avian Influenza outside the EU 2003-05

Source: World Organisation for Animal Health (2003-05) Disease Information weekly publication

2.2 The outbreak of the disease inside the EU

Figure 2.2 presents the evolution of first confirmed outbreaks of Avian Influenza within the EU borders in 2006 Table 2.1 presents the total number of outbreaks and the date of the last confirmed outbreak by Member State In February 2006 the H5N1 virus reached the EU The first outbreak occurred in wild swans in Central Macedonia-Greece (February, 9, 2006) In less than ten days, wild birds were found to be infected in five Member States:

five outbreaks in wild mute swans were confirmed in Southern Italy (February 11);

one in Slovenia (February, 12);

two on the German Island of Rügen (February, 14);

one in France (February 17); and,

one in Austria (February, 18)

Further H5N1 infections in wild birds were subsequently reported in the Slovak Republic (February 20), Hungary (February 21), Poland (March 6), Denmark (March 14), Sweden (March 15), the Czech Republic (March 27) and the United Kingdom (April 6) Although there was a continuous decline in the number of cases from April 2006, the virus was later confirmed in a great crested grebe in Spain (July 7)

The virus affected domestic poultry in five Member States Outbreaks in domestic poultry occurred more than four months after Member States had first communicated sharp falls in consumption of poultry meat (on 19 October 2005) following outbreaks in wild birds in Turkey and Romania; these falls in consumption were between 10% and 50% (Table 2.2) As a result of the first sharp falls in consumption, the industry tabled a request in the EU advisory group of 24 October 2005 for actions

to be taken such as storage assistance and communication campaigns Belgium informed the Commission that that some Third Countries were closing their borders to EU poultry meat on 16 November 2005

France was the first country to find an outbreak of H5N1 in a commercial flock on February 26,

2006 Sweden confirmed its first outbreak in a game bird on March 17 Subsequent outbreaks were reported among domestic poultry on a single turkey farm in Germany (April 5), in backyard poultry

in Denmark (May 18) and on a single farm in Hungary (June 9) As of the end of 2006, 491 cases of Avian Influenza H5N1 were reported across fourteen Member States In 2006, Germany reported the highest number of outbreaks in wild birds while the majority of the H5N1 outbreaks in domestic poultry occurred in Hungary An analysis of the EU situation in 2008 and 2009 indicates fewer outbreaks of highly pathogenic Avian Influenza and fewer infected countries compared to the same period in 2006 and 2007

Table 2.1: Total outbreaks of H5N1 Avian Influenza and date of first and last confirmed outbreak (2007-2009) in EU Member States

*: there are two outbreaks not caused by the H5N1 Asiatic strain (2009 ES and 2008 UK)

** Bulgaria and Romania joined the EU in 2007 It should be noted that there were already outbreaks in Romania in 2005 (13/10-27/12/2005; 27 outbreaks)

Source: European Commission (Animal Disease Notification System); OIE; DG SANCO AI Chronology

Figure 2.2: Spread of Avian Influenza inside the EU 2006

Source: World Organisation for Animal Health (2006) Disease Information weekly publication

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 disturbances that the exceptional market support measures aimed to address

The best way to present the loss of consumer confidence is through a timeline which shows the main events and the impact that these were reported to have had This provides the context within which the Exceptional Measures were introduced and for the period for which they were eligible The composite timeline below (Table 2.2) has been developed based on various sources including: our exploratory interviews, contemporary newspaper reports, official statements, press releases and relevant literature It should be noted that while this timeline brings together key evidence identified,

it is not designed to be an exhaustive inventory of actions and reactions It should also be noted that poultry meat was affected far more than the egg sector and where we refer to decreases in consumption this relates mainly to the poultry meat sector Finally, not all reductions in consumption and prices set out below are seasonally adjusted and, as section 2.4 goes on to show, there is a seasonal component in both the poultry meat and egg sectors

Based on the timeline developed, the crisis of confidence can be broken down into four broad phases

as set out below:

Phase 1: Media discussions of Avian Influenza have limited effect on consumer

confidence (before October 2005) During this period, Avian Influenza was not

widely present in countries close to the EU There were various discussions about Avian Influenza, but these were more focused on the prevention of spread, and veterinary measures and some preventative measures were being taken There was little media reference to a crisis of confidence, although according to the Italian poultry association, consumption in Italy started to drop in August

Phase 2: First crisis of consumer confidence (October 2005) Avian Influenza reached

several countries which border the EU, but remained outside the Community Poultry consumption fell considerably in several EU countries Media commentary on Avian Influenza was intensive, and the media considered EFSA’s statement regarding the risk of contraction of Avian Influenza from poultry or eggs to be inconclusive Restrictions were placed on imports into the EU, and veterinary/preventive measures were taken

Phase 3: Interim recovery (November-December 2005) The crisis of confidence receded

and consumption recovered to various extents depending on the Member State Media commentary on Avian Influenza became less widespread Preventive measures and restrictions on imports remained in place

Phase 4: Second crisis of confidence (January 2006-July 2006) The second crisis of

confidence can be broken down into three sub-phases:

Beginning (January 2006) Human deaths from Avian Influenza were reported in

Turkey European media coverage increased and there were notable decreases in consumption in some Member States In some cases consumption later recovered

towards the end of the month

Intensification (February 2006) Avian Influenza in wild birds reached EU territory

Decreases in consumption of varying magnitudes were reported in most Member States The magnitude of decreases in consumption was generally greater than those

in the first crisis of confidence Media coverage was intensive Italy and Greece, along with the support of 11 other Member States, requested assistance from the Commission

Start of recovery (March-July 2006) Consumption levels remained significantly

below normal in many Member States, but were generally not as low as in February and were generally starting to recover Media coverage began to decline

Table 2.2: Timeline of events and loss of consumer confidence

Month, outbreaks and events Impact, reaction

Phase 1: Limited effects

July – September 2005

On 23 July Russia is the first neighbouring country

to confirm H5N1 AI outbreaks (3) in domestic

poultry

On 29 July Kazakhstan reports its first outbreak

of H5N1 in domestic poultry

On 10 August Mongolia confirms its first

outbreaks of H5N1 (2) in wild birds

On 26 August an EU expert group meets and makes several recommendations, including communication with consumers

to avoid loss of confidence (Finfacts 2005)

In Germany, states fail to agree on emergency measures which would ban outdoor holdings In September, some German

states introduce a ban independently 1 (USDA 2005a)

According to the Italian poultry association, consumption in Italy starts to fall in August (AVEC 2006) According to the

Italian farmers union, poultry consumption falls 20% during August and September (Les Echos 2005)

On 22 September EU Member State Chief Veterinary Officers and Chief Medical Officers meet in Brussels to

discuss Avian Influenza and Influenza Pandemic Preparedness Planning (USDA, 2005h)

Phase 2: First crisis of confidence

October 2005

On 6 October Turkey reports its first outbreak

of H5N1 in domestic poultry The Commission

adopts an urgent safeguard Decision

(2005/705/EC) for Turkey suspending imports of

birds and products for which Turkey is authorised

On 7 October Romania reports its first outbreak

in domestic poultry The Commission adopts a

Decision (2005/710/EC) for Romania, suspending

imports of birds and products for which Romania

is authorised

On 21 October Croatia reports its first outbreak

in wild birds

By mid-October there is a 10% fall in the volume of poultry sales at Rungis wholesale market in France according to the

French wholesale federation This fall later increases to between 15% and 20% (TF1 2005a, 2005b) According to a statement from the French poultry association, poultry sales have fallen by 10% across France (Food Production Daily, 2005a) Poultry is selling at 20-30 cents per kg cheaper than the normal price of around €3, and there are concerns about the upcoming Christmas season (TF1 2005a)

The poultry industry in Spain says that consumption has fallen 10% The industry starts stockpiling meat: 5,000 tonnes in

the last week of October (El Mundo, 2005a)

Initially there are media comments in the UK that consumers may want to reduce poultry and egg consumption (BBC,

2005) However retailers later report that consumption has not changed The industry takes preventive action in its sourcing policy 2 (Food Production Daily 2005c, Food and Drink Europe 2005a, 2005b)

There is a lot of discussion about AI in the media in Germany following the outbreaks in Turkey, but the discussions focus

on possible airborne transmission to humans and vaccinations rather than transmission through consumption According to the German poultry association, consumption drops by between 20% and 25% (AVEC 2006)

According to a Greek newspaper, consumption of poultry in Greece falls by 40% in one week (Food Production Daily

2005a) According to the USDA, consumption falls by 55% in October (USDA 2006f) The Greek poultry association reports that consumption fell by up to 80% (AVEC 2006)

According to the Italian farmers’ association, consumption in Italy falls by 33% (Xinhua 2005a) AVEC later reports a

30-40% fall The farmers’ union reports a 30-40% fall in price (Food Production Daily, 2005b)

1 Lower Saxony and North Rhine Westphalia Lower Saxony was more at risk due to the fact it is on a migratory route and is a main poultry producing region

2 One example is the sourcing of local poultry rather than imported

Retail sales of poultry in Hungary drop by 15-20% at the end of October/ beginning November Consumption of broilers

drops 30% In the same period the poultry association launches a public relation campaign, and agrees a voluntary one-third cut in production (USDA 2005c)

The farm gate price of poultry in Poland drops by 11% between August and the end of October Medium and small-scale

producers are affected the most, with production dropping 25% and sales by 50% (USDA 2005d)

There are reports that consumption in non-EU Romania has fallen by 50% (USDA 2005e, Xinhua 2005a)

On 26 October, EFSA issue a statement which contains (among other information) the following sentence: “ the most

likely route of infection is through close contact with infected live poultry and not through the consumption of poultry or eggs The latter possibility cannot however be excluded” (EFSA 2005)

Phase 2: First crisis of confidence/Phase 3: Interim recovery

November 2005

On 9 November Kuwait confirms its first

outbreak in wild birds after detecting antibodies in

a flamingo

Newspapers report a fall of poultry consumption in Russia (RFE 2005)

According to a combined industry statement of early November, poultry consumption in Spain has fallen 15% (Consumer,

2005a) According to one report, Spanish producers are losing between €9 and €10 million per week (Consumer 2005b)

A USDA report finds that the Spanish government completed a large-scale information campaign with positive effects In the third week of November, prices are down 33% but overall meat consumption up 13% on the same week of the previous year (USDA 2005f)

Italy is reported to have supported the sector with €20 million (Consumer 2005b)

Consumption in Italy is down by 50% at the beginning of November according to the national poultry association (AVEC

2006)

By the end of November, consumption in non-EU Bulgaria has dropped 10-15% since the confirmation of outbreaks in

neighbouring countries in September and October (USDA 2005f)

European Commission introduces export refunds for chicken cuts at a rate of €10/100kg (European Commission,

2005a)

Some Third Countries start to close their borders to EU poultry products

December 2005 According to the French poultry association, consumption in France recovers in the period up to Christmas (AVEC 2006)

According to the Greek poultry association, consumption in Greece almost entirely recovers following the October falls

(AVEC 2006)

Likewise, the Italian and German poultry associations report that consumption in Italy and Germany almost entirely

recovers by Christmas (AVEC 2006)

In non-EU Romania, the poultry producers association reports losses of USD 41 million in the last trimester of 2005 This

was primarily due to sales price drop (41%), delays in populating farms (23%) and storage costs (14%) Consumption has fallen and imports have decreased by 35% each month between October and December (USDA 2006e)

January 2006

Human deaths from AI were reported in Turkey

in early January

France’s Agriculture minister reports a 20% fall in consumption since October Various veterinary measures are

introduced at the national level, and €6 million assigned to compensating the poultry industry (TF1 2006a)

On 5 January the UK Food Standards Agency re-iterates that the risk of humans acquiring AI through the food chain is low

(USDA 2006a)

According to the Greek poultry association, consumption in Greece falls by up to 80% at one point during the month; by

the end of the month the market has partially recovered and volumes are 30% lower than normal (AVEC 2006)

Consumption in Italy falls by 50% before recovering a little according to the national poultry association (AVEC 2006) The Hungarian poultry association reports slightly lower than normal consumption in Hungary (AVEC 2006)

In non-EU Romania, a subsidy of 1.4 RON/head is established for broilers in excess of 1.75kg delivered for slaughtering at

approved slaughterhouses The total budget is set at 81 million RON (USDA 2006o)

The European Commission increases EU export refunds for whole poultry to €26/100 kg (European Commission

On 9 Feb Greece confirms 3 outbreaks in

migratory birds Furthermore, in Thessaloniki the

Greek Ministry of Health reported a significant

increase in people with flu like symptoms who

have requested testing for H5N1

On 11 Feb Italy reports its first outbreaks (5) in

dead wild swans

On 12 Feb Slovenia reports its first outbreak in

wild birds

On 14 Feb Germany reports two outbreaks in

wildlife

On 17 Feb France reports its first case of

Consumption in Turkey falls 70% according to a Turkish Newspaper The industry is losing USD30 million per month

according to the national poultry union (Food Production Daily 2006a)

According to the national poultry association, consumption in Greece falls by 70-80% following outbreaks among wild

birds For the last week of February/first two weeks of March, consumption is down 65% (AVEC 2006)

There are reports of falls of consumption all over Italy Estimations of falls vary but the consensus of livestock and farming

unions is between 60% and 70% There are different estimations of industry losses too: €500-650 million since the beginning of the crisis or €5 million per day According to some sources, prices have fallen greatly, according to others price is stable Emergency preventive measures are established 3 , and Italy proposes a €100 million assistance package to compensate for economic and social damage from the interruption of farming activities (AVEC 2006, Help Consumatori 2006a and 2006b, Repubblica 2006, Corriere 2006, Guida Sicillia 2006a and 2006b, Il Sole 24 Ore 2006, USDA 2006c)

After AI is found in Hungary, consumption drops by 20% according to the national poultry association (AVEC 2006) The French press reports consumption falls at markets in Austria, and industry losses in Slovenia (Euronet 2006) Consumption in Greece has fallen by 40-50% since detection according to the French press (RFI 2006) Total economic

damage officially reported by the government and the poultry industry amounted to €50 million by February (USDA 2006f)

In the Middle East, consumption has fallen by 20% (RFI 2006)

The German livestock association reports falls of 10-15% in consumption in Germany (KSTA 2006) The poultry

association reports a fall of 20-30% following the finding of AI (AVEC 2006)

3 For example, the establishment of a 3km protection zone and 10km surveillance zone around outbreaks, and a ban on poultry holdings outdoors

On 18 Feb Austria confirms its first outbreak in

two dead swans

On 20 Feb two outbreaks of H5N1 in wild birds

were reported in Slovakia

On 21 Feb Hungary confirms its first two

outbreaks in wild birds

On 26 Feb an outbreak of AI H5N1 on a turkey

farm was confirmed in the French department of

Ain It is the first EU case of H5N1 in a

commercial farm

Government is expected to prepare more aid (TF1 2006b)

According to the UK poultry association, there is no evidence of a decline in UK poultry sales despite widespread media

coverage of AI (AVEC 2006, USDA 2006g)

There is an EU farm Minister’s Council on 20 February Italy and Greece, supported by FR, DE, ES, PT, MT, CY, HU,

PL, IE, SI and NL, present the Commission with a request for agreement for an economic plan to compensate the poultry sector for losses suffered during the AI crisis Commissioner Fischer Boel comments that the market measures requested were not foreseen in the case of a lack of domestic demand for poultry – the request will be examined but it will take a longer period to do this There is also a separate meeting between Commissioner Fischer Boel and Italian officials to discuss the proposed €100 million Italian support package (USDA 2006d) The EU approves the Dutch vaccination plan against AI for certain domestic poultry (USDA 2006i)

The European Commission increases EU export refunds for whole chicken to €30/100 kg (European Commission

On 15 March Sweden reports 5 outbreaks in

wild birds and, on 17 March 1 outbreak in

domestic poultry

On 27 March Czech Republic confirms its first

outbreak in wild birds

On the German island of Rügen a cat was also

found dead after infection with AI H5N1

On March 17 Sweden reports an outbreak in a

National Poultry associations meet in Brussels on 13 March for a special meeting to discuss the situation in depth They provide the figures below relating to falls in consumption and price and the accumulation of stocks (AVEC 2006) 4 :

There are stocks of 30,000 tonnes in France Sales of poultry fell 15% in the first week of March (35% for whole

chicken and 25% for turkey)

There are stocks of 25,000 tonnes in Greece (25 times normal levels), and accumulated losses of €80 million

(excluding stocks)

In the Czech Republic, consumption has fallen by 10% Stocks have increased by 100%

Production in Denmark is down by 7% and sales have fallen by 5%

Consumption in Poland is down 35% and prices have fallen

Current consumption is down by 30% in Italy compared to March of the previous year Prices are 20-30% below the

cost of production There are stocks of 60,000 tonnes

In Belgium consumption is down 25%, and production is down more than 10% Stocks have increased by 50% to

20,000 tonnes; half of this is legs

Production in Hungary has decreased by 15% for chicken and 8% for other poultry Stocks are 12,000 tonnes The

4 Please note that in some cases the associations specified the timeframe for falls (e.g France: 15% fall the first week of March) and in some cases they just provided a more general figure without a timeframe

detect infected wild birds

Subsequent outbreaks of H5N1 in wild birds

occurred in Italy, France, Slovenia, Germany,

Poland, Croatia, Denmark and Greece

Demand inside the Netherlands is down 5% However, 60% of Dutch production is for export, and exports have

almost stopped Stocks at the beginning of January were 40,000 tonnes

Consumption inside the UK is fairly balanced due to heavy, costly promotion by companies, though consumption has

decreased at the beginning of March Stocks are up 5-7% and there is oversupply for the wholesale markets, mainly due

to imports from other Member States

Consumption in Germany at the beginning of March is down 10-15%; it has recovered a bit from previously deeper

falls Stocks are over 50,000 tonnes

German livestock associations report 10-20% fall in poultry consumption in Germany compared to the same time last

year/beginning of crisis, with estimates varying between associations Prices have fallen slightly Turnover losses amount to

€150 million so far According to one newspaper, egg consumption has not been affected There is intensive coverage of

AI in the German media (Zeit 2006, Stern 2006, Epoch Times 2006, Focus 2006)

According to a Spanish Government report, poultry consumption in Spain has fallen 6-7% (Consumer 2006) A later

report puts the fall at 12% for February (Cincodias 2006)

The French Government announces further specialised measures for the AI crisis These include: an immediate cash

advance for specialised poultry farms 5 , and compensation for losses between 1 November 2005 and 30 April 2006 The government had already allocated more than €20 million and €30 million for the assistance of poultry farmers and poultry farming companies respectively It also plans to spend €2 million on a TV advertising campaign (USDA 2006q)

In non-EU Bulgaria, producers agree that poultry meat consumption has fallen 30-40% for the period October 2005 to

March 2006 According to retailers, sales of red meat and seafood products have increased 10-25% for the period (USDA 2006k)

Some 320,000 tonnes of unsold meat are being kept across the EU and price has fallen by 13% on average (ANE 2006)

At a council meeting, the European Commission adopts a proposal for a council regulation amending the poultry and egg CMOs, providing a legal base for action to be taken in the case of a fall in consumer confidence

On 23 March, EFSA publishes a scientific report on AI and food safety (EFSA 2006)

Phase 4: Second crisis of confidence: Start of recovery

Little coverage, the main story is that that the EU is in the process of taking measures A Commission report provides

estimates of consumption falls

In non-EU Bulgaria, most producers, traders and retailers believe that poultry meat consumption has returned to previous

levels (USDA 2006k)

Following an outbreak in non-EU Romania, consumption in the country drops by 80% for a couple of weeks There are

5 Of €1,000 to €2,000

Republic, Germany, and France report

subsequent findings of H5N1 in wild birds

On 18 May Denmark reports its first outbreaks

In June France declares that it is free from highly

pathogenic Avian Influenza

On 7 July Spain confirms its first outbreak in

great crested grebes

In July Germany self-declares freedom from

highly pathogenic Avian Influenza

In Hungary, the veterinary authorities destroy 3,000 poultry and 19,000 ducks following the outbreak on a commercial

farm Various preventative and observation measures are adopted 6 (USDA 2006m)

Regulation (EC) No 679/2006 is adopted by the Council of Ministers on April 25, 2006 The Regulation amends the

poultry and egg CMOs, providing a legal base for action to be taken in the case of a fall in consumer confidence

Regulation (EC) No 1010/2006 is adopted and published on 3 July 2006

The annexes to Regulation (EC) No 1010/2006 are amended on 12 July 2006

Beach, et al (2008) completed a study on the coverage of Avian Influenza in the European media using

an English language search for Avian Influenza keywords in the LexisNexis academic search engine

We have added together the author’s counts of Italy-specific and non-Italy-specific articles to produce Figure 2.3 As can be seen in the Figure, broadly speaking media activity tracked periods when the crisis appeared to have intensified as shown in our timeline

Figure 2.3: Coverage of Avian Influenza in European English language newspapers 2005/06

Source: Beach, et al (2006) based on data from the Lexis-Nexis academic search engine and Agra CEAS Calculations

2.3.1 Reasons for the loss of consumer confidence

Having described the process of loss of consumer confidence, it is appropriate to consider briefly the factors behind this It is established in the literature that media coverage of food safety issues influences consumer perceptions of specific food incidents and food products (for example, De

Jonge, et al, 2010)7 It might therefore be expected that media reporting during the Avian Influenza crisis is a causal factor in the loss of consumer confidence8 Indeed, Beach, et al (2008) examined the

effect of media reports on poultry consumption in Italy using estimated demand equations and concluded that press coverage had strong negative short-term effects on consumption (peaking in the first week or two), but that the impact then receded Although there are differences in food

7 Frewer, et al (2005) found that consumer risk perceptions increased during high levels of (generally negative) media communication in

relation to Genetically Modified food

8 Although it should be noted that the Greek government thanked its media for their calm and responsible tone (USDA, 2006f)

markets and consumption patterns between countries which mean the findings in Italy should be extrapolated to other markets with a degree of caution9, it is nonetheless likely that a similar causal relationship between media reporting and decreases in consumption will have been evident, at least

to some extent, in other countries experiencing, or perhaps expecting to experience, outbreaks of Avian Influenza Similar findings are reported in Beach and Zhen (2008) with respect to other meat sectors and food safety issues suggesting that, in general, media reporting of food safety issues is a causal factor in subsequent decreases in consumption

Our interviews with the poultry sector confirmed that the reporting of Avian Influenza in the mass media, and specifically linking the disease to human 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 did not decline substantially in the UK (USDA, 2006a and USDA, 2006g) The European Commission conducted an assessment of citizens’ perceptions during the Avian Influenza crisis through a Special Eurobarometer report, the fieldwork for which was carried out in late March and April 2006 (European Commission 2006c)

This research showed that there is generally a high level of trust that the main concern of the EU public authorities is the health of EU citizens with 70% of EU-25 respondents agreeing with this assertion (either totally agreeing or tending to agree)10 Against this background less than half (46%)

of citizens agreed that the European Union public authorities state everything they know about Avian Influenza; almost as many (43%) disagreed In some Member States more respondents disagreed than agreed (Spain, France, Luxembourg, Netherlands and the UK) while the proportions agreeing and disagreeing were the same in Greece It is worth noting that while there is some overlap between Member States sceptical of full disclosure and those most affected by a decline in consumer confidence (France and Greece and to a lesser extent Spain), there is no consistent pattern which suggests that this relative lack of trust is, at least not uniformly, related to the apparent crisis

Some 60% of EU-25 citizens agreed that the media disseminated clear information on Avian Influenza There was a degree of variation between Member States and a clearer relationship between Member States most affected by the crisis in consumer confidence and the perception, or otherwise, of media clarity with citizens in Greece, Italy, France and Spain all more likely to consider the media message unclear than citizens in the EU-25 as a whole However, almost three-quarters (74%) of Polish citizens agreed that the media message had been clear which argues against such a relationship

9 It is worth noting though that Beach, et al (2008) conducted their research in order to understand how the US market for poultry meat

might react to a similar outbreak of Avian Influenza

10 In contrast 17% tended to disagree, 4% totally disagreed and 9% answered “don’t know” Agreement with this assertion did vary by Member State with citizens in Belgium, Czech Republic, Malta, Slovakia and Cyprus most likely to agree (more than 80% agreeing) and citizens in Finland, Denmark least likely to agree (59% and 61% agreeing respectively)

European Commission (2006c) also investigated knowledge of human risks linked to Avian Influenza Three areas of knowledge are directly relevant to the consumption of poultry meat and eggs and respondents were asked to say whether they thought the following statements were true or false: Even when it is contaminated poultry is not a health risk if it is cooked: 63% of respondents in the EU-25 agreed this statement is true, 28% thought it was false and 10% answered “don’t know”

The Avian Influenza virus contained in an egg or present on its shell can be eliminated by prolonged cooking: 61% agreed with the statement, 21% disagreed and 18% answered “don’t know”

It is not dangerous to eat the meat of a chicken vaccinated against Avian Influenza: 47% agreed, 29% disagreed and 24% answered “don’t know”

Given the proportions of respondents answering “don’t know”, the main point to note here is the relatively low proportions, less than a third in all cases, who had the wrong perception An examination by Member State reveals that citizens in Italy and Spain tended to be more likely than citizens in the EU-25 in general to provide inaccurate responses On the other hand, awareness of the facts was consistently above the EU average in France and Poland11 and above the EU average in Germany and Greece with regard to the (lack of) risk from eating potentially contaminated chicken and egg

Figure 2.4 presents the average correct answers for these three questions to illustrate the relatively high level of understanding Member States experiencing an outbreak of Avian Influenza are shown in the darker blue Taking answers to all three questions together it is apparent that, in general, citizens in Member States where there had been outbreaks were better informed than those where there had not been outbreaks; possibly the result of relatively successful communication efforts or simply heightened awareness on the part of consumers The most notable exception is Italy where not only were there cases of Avian Influenza, there was also a crisis in consumer confidence This was not the case in the UK, with similarly low levels of awareness on food safety, where although there had been cases of Avian Influenza, there was no discernible crisis of consumer confidence

It should be noted that, perhaps counter-intuitively, awareness of the safety of food products in four

of the six Member States most affected by a loss in consumer confidence (France, Poland, Greece and Germany) is very high; only in Italy and Spain was awareness low as might be expected given the collapse in consumer confidence

However, the timing of the fieldwork for the Eurobarometer is important because the original EFSA statement on the risk of eating contaminated meat and eggs which caused a degree of confusion, was released on 26 October 2005 while the second statement, which was more reassuring, was released

on 23 March 2006 (see Table 2.2) All Eurobarometer fieldwork was conducted 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

the research been conducted closer to the release of the first EFSA statement or contemporaneously with the crisis

Figure 2.4: Proportion of correct answers for questions on food safety and Avian Influenza contamination

Source: European Commission (2006c) and Agra CEAS Consulting calculations

It is difficult to draw a conclusion from this apparently contradictory evidence and it may simply be the case that communication efforts were more intensive in Member States where Avian Influenza outbreaks had occurred12 However, although the message that it remained safe to consume poultry and egg products generally reached citizens, the message appears to have been rather ineffective in persuading consumers to continue purchasing chicken and egg products in some Member States

The above raises a concern (shared by Beach, et al, 2008) which is why, if citizens generally trust the

authorities, found information on the risks from Avian Influenza clear and demonstrated understanding of the safety of poultry and egg products, did purchases of poultry meat apparently decline so substantially in some Member States? The answer to this question is probably explained,

at least in part, by the timing of the Eurobarometer fieldwork Had this been carried out nearer in time to the height of the crisis, specifically between EFSA’s first and second statements on the risk

from eating contaminated products, consumer understanding and trust might have appeared more coherent with reported decreases in consumption

2.4 Subsequent market developments

Having considered the process of the loss of consumer confidence and reasons for this, this section examines in more detail recorded changes in consumption and the associated impact on prices and production It also briefly considers the impact that these changes had on producer income

Before examining changes since the 2005 Avian Influenza crisis it is important to understand the context of the EU poultry meat and egg sectors Figure 2.5 shows that the largest EU poultry meat producers in 2005 were France, UK, Spain, Germany, Italy and Poland and that the largest EU egg producers in 2005 were France, Spain, UK, Germany and Italy

Figure 2.5: Main EU-25 poultry meat and egg producers in 2005 (‘000 tonnes, % of total EU-25 production)

Source: AVEC (poultry) and European Commission, Management Committee (eggs)

In 2005 our case study countries accounted for 59% of total EU-25 poultry production and 70% of egg production Any disruption to the markets in these Member States would therefore have had a substantial impact on the EU market as a whole

2.4.1 Consumption

Figure 2.6 shows annual per capita consumption of poultry meat and eggs in the EU-25 The main crisis period is shaded in blue More frequent data are not available, but the Figure shows a reduction in per capita consumption of poultry meat of 1.7% from 2004 to 2005 and a reduction of 0.7% to 2006 before consumption returned to the level experienced in 2001 and 2002 Per capita consumption of eggs fell by 4.4% in 2005 and then increased by 1.1% in 2006

FR, 1,918 , 17%

UK, 1,581 , 14%

ES, 1,302 , 12%

DE, 1,197 , 11%

ES, 924 , 13%

UK, 819 , 12%

DE, 816 , 12%

IT, 777 , 11%

NL, 607 , 9%

PL, 545 , 8%

Others, 1,355 , 20%

Total EU-25 egg production 6,844

Figure 2.6: Annual per capita consumption of poultry meat and eggs in the EU-25 2009)

(2000-Source: Avec, Eurostat and Agra CEAS Consulting calculations

Note: EU-25 excludes Cyprus, Malta and Slovenia from 2005 and also excludes Estonia from 2006

Figure 2.7 presents annual per capita consumption of poultry meat in our case study countries and compares this to the EU-25 situation The crisis period is shaded in blue Only Italy saw a reduction

in per capita consumption in annual terms between 2004 and 2005, although steep falls in consumption are noticeable in Hungary, Italy and Greece between 2005 and 2006; in the case of Greece this decrease followed a rise between 2004 and 2005 There were marginal increases in consumption in France and Poland between 2005 and 2006 It should, however, be stressed that short-term changes in consumption will be masked in the annual data and may not be detectable or may appear less substantial and therefore the annual data cannot be considered representative of the complete crisis impact

Figure 2.7: Annual per capita consumption of poultry meat in case study countries and EU-25 (2000-2009)

Source: Avec, Eurostat and Agra CEAS Consulting calculations

Note: EU-25 excludes Cyprus, Malta and Slovenia from 2005 and also excludes Estonia from 2006

Annual per capita consumption of eggs in the EU-25 and our case study countries is presented in Figure 2.8 with the crisis period shaded in blue The steepest reduction in consumption was in Spain between 2004 and 2005, but consumption then rallied in 2006 The same pattern, although much less extreme, was also evident in the Netherlands, although here the decline in consumption was much less marked than it had been in 2003 Per capita consumption in France and Italy generally trended downwards from 2000, with a more noticeable annual reduction between 2005 and 2006, which was in both cases followed by an upturn

Figure 2.8: Annual per capita consumption of eggs in case study countries and EU-25 (2000-2007)

Source: FAO, Eurostat and Agra CEAS Consulting calculations

2.4.2 Prices

Figure 2.9 presents the evolution of poultry meat and egg prices in the EU from 2000 to September

2008 and shows the crisis period shaded in blue The data are a weighted average for Member States

at the time, i.e EU-15 from 2000 to April 2004, EU-25 May 2004 to December 2006 and EU-27 from January 2007 Successive enlargements had no appreciable impact on the weighted average prices

The main points to note are that:

there has been a steady upward trend in prices consistent with inflation13, although the increase

in poultry meat prices has been more substantial than with respect to eggs;

there have been a number of instances where there have been substantial price variations which have coincided with factors ranging from an Avian Influenza outbreak in 2003 to high feed prices

the egg series tends to lag the poultry meat series slightly; and,

a drop in prices from August 2005 is clearly visible in the poultry meat series, but is much less evident, and lagged, in the egg series The decrease in poultry meat price was 17.3% between August 2005 and March 2006, while egg prices fell by 12.7% between March 2006 and June 2006 having been on an upward trend in the second half of 2005

Figure 2.9: Weighted average EU poultry meat and egg prices (2000-September 2008)

Source: European Commission

Figure 2.9 also suggests that there is an element of seasonality in the data, although this is difficult to pick out given the other factors impacting on price over the period, most notably the 2003 Avian Influenza outbreak Figure 2.10 presents the data by month rather than for the entire period to highlight this In both cases it is apparent that there is a pattern Poultry prices tend to be at their highest in the summer months before declining, i.e the seasonal dip in prices tends to occur concurrently with the 2005/06 crisis in consumer confidence In the case of eggs prices decline in spring before climbing once more in autumn Again this pattern coincides with the rather later decrease in egg prices shown in Figure 2.9 The presence of seasonality does not explain the changes

in price seen in late 2005/early 2006, there were clearly other factors at work However, the fact that there is an element of seasonality which coincided with the crisis does mean that a degree of caution should be exercised when commenting on the magnitude of the decline in prices

Figure 2.10: Weighted average EU poultry meat and egg prices showing seasonality (2000-September 2008)

Source: European Commission

Seasonality notwithstanding, Figure 2.11 presents a price index for poultry meat from August 2005 to September 2008 (August 2005=100) showing the EU-25 and our case study countries Prices in Italy and Poland experienced the sharpest falls while prices in France also declined steeply after initially remaining above the EU-25 average Prices in Hungary initially fell more slowly than for the EU as a whole, but the decline continued for longer and prices did not recover until the end of 2006 compared with mid-2006 for France and Italy The fall in prices in Poland was also relatively long-term with prices regaining August 2005 levels consistently only from May 2007 Prices in Spain dipped initially, but then recovered quickly and, apart from a short lived decline between February and March 2006, remained substantially above August 2005 levels for the remainder of the period Prices in the Netherlands followed a similar pattern to those in Hungary in that the dip was shallow, but relatively persistent

Commission Services pointed out that margins in the sector are generally low and volatile This means that a decline in prices over a short period has the potential to cause substantial income losses International data for the US14 shows that margins can become negative rather quickly when prices decline, although margin data made available by DG AGRI did not bear this out in this case

Figure 2.11: Poultry meat price indices EU-25 and case study countries (August September 2008, August 2005=100)

2005-Source: European Commission and Agra CEAS Consulting calculations

Figure 2.12 presents a price index for eggs from August 2005 to September 2008 (August 2005=100) showing the EU-25 and our case study countries There is little evidence at the EU-25 level of a collapse in prices contemporaneously with the collapse in consumer confidence documented in section 2.3 However, EU-25 prices did eventually start to decrease from March 2006 to July 2006

by which time they had returned to the same level as in August 2005 Prices in the case study countries generally followed the same pattern, although egg prices in France declined sharply between December 2005 and January 2006 Prices in the Netherlands suffered a similar, though less dramatic, sharp reduction in price between October 2005 and November 2005 Greece witnessed relatively static egg prices until January 2007 when prices began to follow the same trend as in other Member States

Figure 2.12: Egg price indices EU-25 and case study countries (August 2005-September