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CAP Reform Ref: CAPreform feb07 Introduction Original system – problematic Pressure for reform –Budget –External –Consumer –Environmental Fig1: welfare.

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Presentation on theme: "CAP Reform Ref: CAPreform feb07 Introduction Original system – problematic Pressure for reform –Budget –External –Consumer –Environmental Fig1: welfare."— Presentation transcript:

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2 CAP Reform Ref: CAPreform feb07

3 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)

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

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

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

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

8 Early 1980s Guidelines for European Agriculture –Aim: reduce production & prices –Partially implemented, not significant

9 Reform: Milk Quotas 1984 Marketing quotas imposed –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

10 P Q D S Pw P intv Fig2 CAP:Milk quota Quota Qs C D

11 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

12 Quotas v Reduction in price support Fig 3: Reducing price support (P intv to P1 intv ) 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

13 P Q D S Pw P1 intv P intv Fig3 CAP: Alternative - price support reduction v quota

14 P Q D S Pw P1 intv P intv Fig3 CAP: Alternative - price support reduction v quota F F

15 P Q D S Pw P1 intv P intv Fig3 CAP: Alternative - price support reduction v quota F F G

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

17 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

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

19 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

20 Fig 4 –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

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

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

23 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

24 CAP reform, June 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

25 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

26 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)

27 Source: House of Lords EU Committee, The Future Financing of the CAP, session

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

29 Conclusions CAP has achieved some of its 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


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