3What is the CAP?The Common Agricultural Policy (CAP) is one of the EU’s flagship policies, involving a series of objectives and subsidy programmes relating to agricultural production, rural development and the environment.It is the biggest single item in the EU budget, accounting for around €55bn a year, or 40% over the current 2007 – 2013 EU budgetary framework period.
5Short HistoryIn 1957, when the Rome Treaty established the EEC, World War II memories of food shortages were still freshIn 1958, the delegations of the Six meet in Stresa, Italy, to discuss the introduction of a common agricultural policy (CAP)France made it a condition of its participation in the EEC that agricultural policy be a joint pillar alongside the common market in industrial goods.The creation of a CAP was proposed and adopted in 1960 by the European CommissionCAP came into force in 1962
7Major Principles of the CAP Market unityCommunity preferenceFinancial solidarity
8Objectives of the CAPto increase agricultural productivity by prompting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour,to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture,to stabilise markets,to assure the availability of supplies,to ensure that supplies reach consumers at reasonable prices (Rome Treaty, Article 39).
9Why is Agriculture Different? Continuous demandfood availability indispensable on a daily basistotal food demand is income and price inelasticDiscontinuous supplyland and farm labour are fixed in time & spaceweather-induced major uncertaintiesbiological cycles in production (e.g., beef, olive oil)unexpected shocks (diseases, natural disasters etc)Result: volatility of prices (and consequently of farmers’ income)
10Functioning of the CAPPublic intervention and protection through a guaranteed price system (European Agricultural Guidance and Guarantee Fund - EAGGF)Intervention and protection:EU agencies buy when prices fall below the intervention priceProduction quotas (e.g. sugar)Subsidies for storageTariffs and export subsidies
11Price support mechanism Varies with each product eg cerealsSets Target price, Threshold price and Intervention priceTarget price (Ptarg)set on a yearly basis and is maintained at a level which the product is expected to achieve on the market in the area where product is in shortest supplySet by Commission
13Variable levy (VL) (import tax) Threshold price (Pth)the minimum price level that imported agricultural products can enter the EU marketAim: protect EU farmers against foreign competitionVariable levy (VL) (import tax)Pth minus lowest world priceCalculated dailyVL raised if Pw fellRevenue source
14PSTarget pricePtarg*PthThreshold pricePwWorld priceDQ cereal* Transport & storage
15PSTarget pricePtarg*PthThreshold priceVariable levyPwWorld priceDQ cereal* Transport & storage
16Intervention price (Pinv) Minimum priceas Pth exceeds world market prices and thus an excess supply occurs, the authorities aiming to keep prices close to the target price, set a price – usually 7 or 8% below the Ptarg – and intervene the market by purchasing the excess supplyGiven to producers whatever they doPinv changes over season (as do other prices)
21CAP: Victim of its own success Artificial pricing system rewards high production: “butter mountains, wine lakes”Costs: 70% of EC budget until early 1980s (87% in 1970)High prices for consumersEnvironmentPressure from WTOFarmers become ‘rent seekers’
24Early Attempts: Mansholt Plan 1968: Sicco Mansholt, the European Commissioner for Agriculture offered the'1980 Agricultural Programme‘Suggested that production methods should be reformed and modernisedAim was to encourage nearly 5 million farmers to give up farming via vocational training measures and early retirement. That would make it possible to redistribute their land and increase the size of the remaining family farmsCalled on the Member States to limit direct aid to unprofitable farmsangry reaction of the agricultural community, scope limited to modernisation
25MacSharry Reforms1992: European Commissioner for Agriculture, Ray MacSharryneed to design the CAP according to the GATT principles.Aims:to limit rising production,adjusting to the trend toward a more free agricultural market.MacSharry reforms focused on major crops (cereals, oilseeds, and protein crops) and beef, by lowering intervention) prices substantially (30% for cereals and 15 % for beef) and compensating farmers for lower prices with direct payments.
26MacSharry Reformscreated ‘set aside’ payments to withdraw land from production, payments to limit stocks, and introduced measures to encourage retirement in agricultural sector'de-coupling' of income support from production support, arable farmers were compensated by payments made on a per hectare basis.
27Agenda 2000 Reforms Published in July 1997 Goals: to ensure the competitiveness of the EU agricultural sector, both on the Community market and on growing export markets;to promote ways of farming that contribute to the maintenance and enhancement of rural environment and landscapes;to contribute to sustaining the livelihood of farmers while promoting the economic development of the wider rural economy.
28Agenda 2000 Reformsdivided the CAP into two 'Pillars': production support and rural developmentaimed to enhance the competitiveness of EU on both domestic and external markets by bringing the prices of agricultural products closer to world prices, reductions in market support prices ranging between 15% for cereals and 20% for beef.aimed to strengthen the environmental provisions of the CAP and to integrate them into a broader policy for rural development
30Rural PolicyModernising agricultural holdings and improving their viability.Training linked to the promotion of quality and to environmentally beneficial production.Setting up aids to facilitate the establishment of young farmers who are under 40 years of age and setting up an agricultural holding for the first time.Early retirement of the agricultural workers over 55 years.Compensatory allowances for farmers in less-favoured areas.Agri-environment measures as the only compensatory element of the programme, where payments are given to farmers who engage in farming practices compatible with environment protection.Improvement and rationalisation of processing and marketing of agricultural products, thereby increasing the competitiveness and value added of those products inside the EU.Support for forestry contributing to the maintenance and development of the economic, ecological and social functions of forests.
312003 Fischler Reformsled to a further shift away from intervention in agricultural markets, while strengthening the rural development aspect of the CAP.‘decoupled’ direct payments from production via the Single Payment Scheme (SPS).allowed member states to shift funds (although only up to 5%) away from direct payments towards rural development (modulation).
322008 Reforms: Health CheckFurther incremental reforms to shift the CAP away from market interventions and direct payments to farmers and landowners, towards Pillar 2 objectives, by planning the withdrawal of milk production quotas by 2015, for example.It also reduced the amount of subsidies paid to large farms.
35In 2013 the budget for direct farm payments (subsidies) and rural development - the twin "pillars" of the CAP – is 57.5bn euros, out of a total EU budget of 132.8bn euros (43% of the total).Most of the CAP budget is direct payments to farmers.
36The EU spends around €55 bn a year on farm subsidies. farmsubsidy.org helps people find out who gets what, and why.
41Future of CAP: Further Reform Proposals Better targeted income support in order to stimulate growth and employmentTools to address crisis management which are more responsive and better suited to meet new economic challengesA ‘Green’ payment for preserving long-term productivity and ecosystemsAdditional investment in research and innovationA more competitive and balanced food chain
42Future of CAP: Further Reform Proposals Encouraging agri-environmental initiativesFacilitating the establishment of young farmersStimulating rural employment and entrepreneurshipBetter addressing fragile areasA simpler and more efficient CAP