As global prices hit new highs, the European Commission sold its intervention stocks, removed the obligation to set aside 10% of arable land for the 2008 harvest, increased milk quotas by 2% and suspended import duties on cereals. The plan is to abolish set-aside forever, significantly reducing the role of market intervention, and to phase out milk quotas gradually between now and 2015. The EU executive also notes that "almost all remaining production-linked subsidies will be eliminated, so that farmers have complete freedom to produce what the market requires".

Furthermore, the Commission proposed policy measures aimed at improving market transparency (EurActiv 11/12/09). It decided to enhance monitoring of developments in agricultural markets and analyse the impact of price speculation. The EU executive also announced plans to investigate the functioning of the food supply chain for potential unfair commercial practices, which may be holding back competition and driving up prices.

A review of national and EU-level regulations that hinder the proper functioning of the food supply chain was also initiated, in an attempt to identify regulations that restrict the entry of new companies into the market, prevent business from fully competing and distort the relationship between suppliers and retailers.

The results, published in October 2009, highlight "significant imbalances" in contractual relations between actors in the food supply chain and a lack of transparency of prices along the chain (EurActiv 28/10/09). A European food price monitoring tool is being set up to increase transparency.

Eoin Treacy's view In food as with energy policy there can be a number of competing aims which need to be balanced in order to satisfy all stakeholders. European agriculture needs to serve the needs of consumers, farmers, under developed regions, governments, the environment etc. In addition the restrictions imposed by the GATT negotiations are an additional concern.

One of the greatest injustices of the original Common Agriculture Policy (CAP) was that farmers were paid to produce food that was not needed. This created huge stockpiles and allowed the EU to sell grain on the international market at below cost. These actions artificially depressed food prices and stifled growth in many less developed countries.

The reform of the CAP means that subsidies are no longer linked to production. The introduction of direct payments means that farmers are now paid regardless of what they produce. The focus of subsidy has changed from food production to preserving a rural way of life and the environmental diversity of various countries.

It is not at all clear if this policy has been successful in helping to encourage farmers to increase their output and hence keep prices down. With the removal of subsidies linked to production, farmers are paid regardless of whether their production is economic or not. Additional income now depends on whether their production is competitive on the global market. The EU, or the USA for that matter, is not the lowest cost producer of every commodity. Others, such as Brazil, are capable of low cost, high volume production and have gained market share over the last few years. Sugar is an obvious example.

Without subsidies farmers have to work very hard to produce food at globally competitive prices. With direct payments, they have less incentive to do so. Instead, a focus on non-food production such as wine or trees is a by-product of such policies. The end result has been that food prices have not declined.

Whether as a direct result or not, food prices remain on an upward trajectory. The pull of increased demand, the push of inadequate and ill coordinated supply, inclement weather and the impact of speculation are combining to support prices over the medium term. A large number of agricultural commodities have broken long-term inflation adjusted downtrends. Therefore, while agriculture prices are highly cyclical, we can expect progressions of major reaction lows to continue to rise.