EU accession
On May 1, 2004, Poland and nine other countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia, Slovenia, Cyprus, and Malta) became members of the European Union (EU). Poland is the largest of the new members, in terms of both population and agricultural production. But because of Poland’s fragmented farm structure, it is also the biggest potential headache for the EU.

Most Poles supported the idea of accession, believing the net benefits of membership would be positive. But Poland faced some significant challenges in meeting the criteria for EU membership, and the job is not yet finished. Poland had to harmonize its entire body of laws and regulations with those of the EU before accession. Agriculture was the greatest challenge. In the years leading up to accession, much of Poland's agricultural and food output did not meet EU quality standards, and considerable investment was needed to improve the situation. On the eve of accession, Poland’s larger food processors were ready, but many smaller plants were forced to close. Moreover, in a single market, Polish products will compete equally with EU products in domestic and foreign markets. Many farmers were opposed to EU membership, fearing that they would be unable to compete and could be forced out of agriculture.

Poland's fragmented farm structure is a major obstacle to increasing the competitiveness of Polish agriculture. Poland has around 2 million farms; the average size is now about 8 hectares (20 acres), up from 6 in 1990. In contrast, farms in the former EU-15 average 16 hectares. The sector employs 25 percent of Poland's labor force but accounts for only 6 percent of gross domestic product (GDP). Agriculture in the former EU-15 employs 5 percent of the labor force and accounts for 2.4 percent of GDP. Of the 2 million producers in Poland, only about 600,000 to 700,000 can be considered commercial producers.

The benefits accession will bring to Polish farmers are unclear. Polish producer prices for corn and barley were considerably below the EU intervention price, and recent ERS analysis points to potential output increases, particularly for barley. But Polish wheat prices in 2001 were well above the EU intervention price, and ERS analysis projects a decline in wheat production. Accession could bring higher beef output in Poland, but will bring little change in pork output and a possible decline in poultry output. Before accession, Polish cattle prices were well below EU prices, hog prices were nearly the same, and poultry prices were substantially higher. At the same time, livestock producers will face higher production costs as they strive to comply with EU sanitary and animal welfare regulations.

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Direct payments
The most difficult agricultural issue in the negotiations for EU accession was whether or not Central and East European (CEE) producers would be immediately eligible for the full range of direct payments that EU producers receive. These payments include "compensation payments" intended to compensate EU grain and oilseed producers for the cuts in support prices that came with the 1992 reform of the Common Agricultural Policy (CAP). They are now more commonly called “direct payments” and are paid on a per hectare basis, calculated from per ton amounts tied to regional historical average area and yields, so that they do not influence current production decisions. EU cattle and sheep breeders also receive direct, per hectare payments tied to historical herd levels and regional stocking densities (animals per hectare).

The original EU position statement, issued on January 30, 2002, supported a 10-year transition period before CEE producers would be eligible for the full range of direct payments enjoyed by current EU producers. CEE producers were to receive only 25 percent of the payments for eligible commodities in the first year following accession, gradually increasing to 100 percent during the 10th year.

Poland and other CEE candidates strongly resisted such a transition period, and the final agreement reached at the 2002 Copenhagen Summit—where negotiations for accession were completed—resulted in a significant compromise. The 10-year phase-in remains, and the EU will still provide only 25 percent of the payments during the first year. However, national governments are allowed to top off these payments each year by a maximum of 30 percent, so that payments during the first year of accession could be as much as 55 percent of what current EU farmers receive. CEE governments are allowed to use part of the rural development funds that the EU will provide after accession to finance the higher direct payments.

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Supply controls
There were also serious disputes about the various supply controls imposed by the CAP. EU policy imposes dairy and sugar quotas. The direct payments referred to above are tied to historical "reference" areas, yields, and herd levels. The original EU position was that all these controls would be fixed at 1995-99 averages for each acceding country. The Poles requested higher quotas, insisting that these be based on potential production rather than recent actual production, which the Poles believe had been below potential. The economic shocks associated with economic reform led to sharp declines in crop yields and livestock herds during the 1990s, and the Poles are certain that with the completion of the restructuring process, crop yields and animal numbers can rise above current low levels.

In the end, the EU did not compromise very much on these supply controls. Final quotas are only marginally higher and, in a few cases, actually lower than the original EU offers. The principal exceptions were isoglucose (high fructose syrup made from wheat in Poland; it also can be made from corn or potato starch) and dairy. The final isoglucose quota is 26,781 metric tons, instead of the 2,493 originally proposed by the EU. During the first year of membership, Poland's dairy quota will be no higher than the one that the EU originally proposed in January 2002 (8.9 million metric tons). However, the EU also agreed to a "milk quota reserve" of 416,126 metric tons that will be given to Poland in 2006, to account for an expected increase in retail demand for milk following a decrease in on-farm consumption as farm populations migrate to urban areas.

These compromises will have some important impacts. Direct payments are only partially decoupled from production decisions: producers must produce in order to receive the payments. ERS analysis suggests that increased direct payments do lead to somewhat higher output. However, the most significant impact will be on farm income.

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Accession brings pressures for restructuring
The greatest pressures will be on Poland's livestock producers. Polish livestock farms and meat plants now have to comply with a formidable set of EU regulations, running the gamut from animal welfare rules and plant sanitary requirements to environmental regulations. Over half of Poland's livestock is kept on small farms with less than 10 animals, and before accession, about 40 percent of Polish meat output came from small plants that do not meet EU standards. These plants produced lower quality meat (meaning higher fat content), which is actually preferred by domestic consumers because of its cheaper price.

The need to comply with such regulations will raise production costs and possibly reduce potential competitiveness of Polish livestock products. Even so, most Poles believe the country will continue to be able to produce enough for domestic consumption and a small exportable surplus. During the years leading up to accession, Poland saw a rapid concentration of both animal production and meat processing, resulting in lower costs and more efficient production. However, Poles are worried about potential rises in unemployment as smaller producers and processors are forced out of business.

There is a slow steady process of concentration in the red meat industry. The number of plants on the eve of accession was about 4,000, down from nearly 7,000 in 1997. About 350 of those were classified as medium or large, and they account for about 60 percent of meat output. Four large capital groups control a growing share of the industry. Smithfield, having bought the former state firm Animex, is a major player in the market. The 350 medium and large plants alone could satisfy the total demand for meat in Poland—the industry as a whole is operating only at 70 percent of capacity.

As of March 2003, only 268 of these plants met all EU standards, and Polish authorities were hoping that 1,500 more would qualify by May 1. Many plants that fail to meet EU standards have already been forced to close, and others will soon follow. But the EU agreed to grant transition periods to a small number of firms that have the potential to upgrade enough by 2006 to meet all standards. During the transition period, these plants will only be allowed to sell on the domestic market. As of January 2004, 289 meat plants had been granted such transition periods. It is possible that more were granted this status on the eve of accession.

As of the end of 2003, there were 414 dairy plants processing milk or cheese, and at the time, 50 percent of milk purchased met the top EU standard ("extra class"). Of those plants, 49 were eligible to export to the EU market, 170 expected to adjust to EU standards before May 1, and 99 had been approved for a transition period until 2006. Some of the remainder may also have been granted transition periods, but most were expected to close before May 1.

There has been some consolidation of dairy farms. In January 2004, there were 340,000 dairy farms, down from over 800,000 in 1996. More and more of these are producing “extra-class” milk. Even so, only a third of these producers were reported to be applying EU hygiene rules. Those that still were not as of May 1 will only be allowed to sell on the domestic market.

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CAP reform and Poland’s accession
In June 2003, the EU agreed on some important reforms to the CAP:

• Direct payments will be consolidated into a single farm payment (SFP), based on the producer’s historical payments. These will be close to fully decoupled, although member countries will have the option to retain partial coupling of some payments.
  
  
• The intervention system for rye is eliminated.
  
  
• The intervention price for rice is cut by 50 percent, and intervention purchases are capped at 75,000 metric tons for the entire EU.
  
  
• Cuts in intervention prices for butter (25 percent) and skim milk powder (15 percent)—with partially decoupled compensation payments to farmers—will be phased in over 2004-07. Dairy compensation payments will be converted to the single farm payment by 2008. Intervention purchases of butter are capped and phased in over 2004-08, remaining at 30,000 metric tons from 2008 on.
  
  
• Farmers will be required to comply with the full range of EU environmental, food safety, and animal welfare requirements in order to receive direct payments (this provision is known as cross compliance). Farmers will be required to keep their land in “good agricultural and environmental condition.” Failure to comply will result in a reduction of payments. Many CEE producers do not currently meet all these requirements.
  
  
• There is to be a gradual reduction in direct payments (referred to as modulation) beginning in 2005.

It is too early to forecast the implications of CAP reform for Poland. It is likely that the commodity impacts will be minimal. With the elimination of intervention in rye markets, Polish rye output will likely decline. But it is not clear what Polish producers will do with the land that would be planted to rye under the current CAP. Since cross-compliance provisions will require that producers keep the land in good agricultural condition, producers may want to keep the land under cultivation. Some of them might plant more barley. On the other hand, Polish farmers can convert the land to pasture and still receive the payments. The smallest farmers may find it most profitable to do exactly that.

More analysis is needed to determine the impacts of the proposed cuts in dairy support. The dairy quota that Poland agreed to at the Copenhagen Summit is less than current fluid milk output. Poland’s milk output will be severely constrained, so much so that the proposed cuts in support prices for butter and skim milk powder may not constitute any further constraint.

The cross-compliance provisions could hurt Polish producers. Many Polish producers do not currently meet all the EU requirements. Upgrading their farms will require large investments, and smaller farmers do not have the necessary capital.

On the other hand, modulation and financial discipline provisions will not be enforced in the new member states until their payments reach 100 percent of the level in the former EU-15, so the reductions will not take effect until 2010 or 2013. Also, farms with an income under 5,000 euros will be exempt from payment reductions. This provision will benefit Poland, where most farms remain under that ceiling. But it could discourage the farm consolidation that EU officials insist is essential if Polish agriculture is to become competitive.

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For further analysis of EU enlargement and other issues related to the European Union, see the following:

European Union Briefing Room.

Cochrane, Nancy and Ralph Seeley, EU Enlargement: Implications for New Member Countries, the United States, and World Trade, USDA, ERS, WRS04-05-01, April 2004.

Cochrane, Nancy, A Historic Enlargement: Ten Countries Prepare to Join the European Union, Amber Waves, USDA, ERS, April 2004.

Cochrane, Nancy, EU Enlargement: Implications for U.S.-EU Agricultural Relations, in Normile, Mary Anne and Susan Leetmaa, U.S.-EU Food and Agricultural Comparisons, USDA, ERS, WRS04-04, February 2004.

Cochrane, Nancy, EU Enlargement: the End Game Begins, Agricultural Outlook, USDA, ERS, AGO-296, November 2002.

Cochrane, Nancy, Pressures for Change in the Livestock Sectors of Eastern Europe, Agricultural Outlook, USDA, ERS, AGO-288, January/February 2002.

Cochrane, Nancy, EU Enlargement: Negotiations Give Rise to New Issues, Agricultural Outlook, USDA, ERS, AGO-278, January/February 2001.

Cochrane, Nancy, Agriculture in Poland and Hungary: Preparing for EU Accession, Agricultural Outlook, USDA, ERS, AGO-267, December 1999.

Cochrane, Nancy, Enlargement to the East, Europe—International Agriculture and Trade Report, USDA, ERS, WRS-99-2, October 1999.

Kelch, David, EU's Agenda 2000 and Beyond, Agricultural Outlook, USDA, ERS, AGO-265, October 1999.

ERS Europe Situation and Outlook reports, 1999, 1997, 1996, 1995.

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for more information, contact: Nancy Cochrane
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page updated: July 12, 2004