1. CAP Reform
Ref: CAPreform feb07

2. Introduction Original system – problematic Pressure for reform
Budget
External
Consumer
Environmental
Fig1: welfare consequences
Compare CAP with self sufficiency under free trade ( consider Pw & P intv)
If exported outside EU, export restitution = area abcd ( + storage costs)

3. Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area A
gain in producer surplus (PS) – areas B + A P a S b
Pintv Pw d c D Q

4. Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area A
gain in producer surplus (PS) – areas B + A P a S b
Pintv Pw d c D Q

5. A Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area A
gain in producer surplus (PS) – areas B + A P a S b
Pintv A Pw d c D Q

6. B A Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area A
gain in producer surplus (PS) – areas B + A P a S b
Pintv B A Pw d c D Q

7. Early 1980s ‘Guidelines for European Agriculture’
Aim: reduce production & prices
Partially implemented, not significant

8. Reform: Milk Quotas 1984 Marketing quotas imposed Fig 2: Milk quota
Large surpluses
EU budget problems
Milk accounted for30% of EAGGF
Price support maintained but excess production ‘taxed’ (super-levy)
Fig 2: Milk quota
EU saves areas C+D
CS - no change
PS – loses area C

9. Fig2 CAP:Milk quota
Quota P S
Pintv C D Pw D Q Qs

10. Assume quota allocated efficiently between farmers, if not …..
EU direct control over output
Effective as ‘bottleneck’ in production
Monitor
Ineffective for other products eg.cereals
Other methods used which may also penalise over production
Co-responsibility levies
Budgetary stabilisers
Not so effective

11. Quotas v Reduction in price support
Fig 3: Reducing price support (Pintv to P1intv) instead of introducing quotas
Increase in CS: area F
Fall in PS: areas F + G
Net welfare loss: area G
Argued reducing price support more beneficial than intro quotas

12. Fig3 CAP: Alternative - price support reduction v quota
Pintv
P1intv Pw D Q

13. F F Fig3 CAP: Alternative - price support reduction v quota P S PintvPw D Q

14. F G F Fig3 CAP: Alternative - price support reduction v quota P S
Pintv F G F
P1intv Pw D Q

15. McSharry Reforms Most radical yet Aims incl. International pressure
Partial change
Aims incl.
Reduce support prices
Increase competitiveness
Control production & increase demand
Protect environment
Improve international relations

16. How Reduce price support
Eg intitial 30% for cereals
See fig 3 for benefits
Introduce DIRECT INCOME PAYMENTS to farmers to compensate potential loss of income – SET ASIDE for cereals
Now price supp. & income payments
Partly DECOUPLED farm income supp.
Slippage may be a problem
Early retirement
Consolidation of holdings

17. Environment: Discourage intensive production methods
Subsidies no longer depend upon output alone
Cross-compliance
Exclude small farms

18. Choice: Set-aside or not?
Depends upon market price for cereal & yields
Choice
(1) use all arable acreage & receive lower price
(2) set-aside & receive 2 components
compensation payment + higher (‘original’) price

19. Fig 4 New supply curve Ssa
Assume
All farmers participate in set-aside scheme
All farmers are equally efficient
New supply curve Ssa
If direct compensation equals at least area H, rational farmer will set-aside
Greater complexity
Farms not equally efficient
Prices change after S shifts to Ssa
See additional handout

20. Fig4 CAP: Choice - set aside or not?
Ssa P a S b
Pintv Pw D Q
Qsa

21. Fig4 CAP: Choice - set aside or not?
Ssa P a S b
Pintv H Pw D Q
Qsa

22. Further Reform WTO Agenda 2000 2000 onwards Still 2 systems
Continued move to price supp.
Milk unchanged
Greater emphasis on environment
Greater burden on States
subsidiarity

23. CAP reform, June 2003 2003-2013 Further development of 1993 reforms
CAP comprises 2 pillars
Pillar 1: Market support measures & direct subsidies
Pillar 2: Rural development programmes/policy
Pillar 1 spending 1% growth ceiling (nominal terms) –Brussels Ceiling 2002

24. Move to single farm payment - decoupling
based on value of previous output
Payment linked to environment/food safety/animal welfare standards - cross compliance
Direct payments (Pillar 1) reduced, switch funding to (Pillar 2) Rural Devt. Programmes (RDP)
modulation: transfer funds direct payments to RDPs
incremental

25. Exemptions, eg. cereals 25% payments linked to production (France)
Pillar 2 supports
Agriculture as provider of public good
Development of rural areas
Exemptions, eg. cereals 25% payments linked to production (France)
Financial Perspective
Allocates more to Pillar 1, but Brussels Ceiling. - Pressure!
Proposed expenditure for both pillars CAP down to 26% of EU budget (2013)

26. Source: House of Lords EU Committee, The Future Financing of the CAP, session 2005-06

27. UK linked further CAP reform to the UK budget rebate (2005)

28. Conclusions CAP has achieved some of it’s objectives
Move from price support since McSharry, but now more complex with 2 systems
CAP expenditure as part of budget lower
Conflict with single market?
Political & social aspects
Fraud
Enlargement
Further reform required