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Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann Lecture 5: Common Agricultural.

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Presentation on theme: "Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann Lecture 5: Common Agricultural."— Presentation transcript:

1 Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann

2 AGRICULTURE AND AGRICULTURAL POLICY SubsidiesSubsidies –effects on price and output –the incidence/cost of a subsidy –Cost falls directly on Government/EU Alternative - High minimum pricesAlternative - High minimum prices Also known as price supports or price floorsAlso known as price supports or price floors Was main form of EU assistanceWas main form of EU assistance

3 Minimum price where some of the product is imported P Q O PwPw EU supply QS1QS1 Qd1Qd1 EU demand Imports

4 P Q O PwPw PtPt EU supply QS1QS1 Qd1Qd1 EU demand Import levy Minimum price where some of the product is imported

5 P Q O QS2QS2 PwPw PtPt EU supply QS1QS1 Qd2Qd2 Qd1Qd1 EU demand Import levy Imports Minimum price where some of the product is imported

6 P Q O QS2QS2 PwPw PtPt EU supply QS1QS1 Qd2Qd2 Qd1Qd1 EU demand Import levy Imports Minimum price where some of the product is imported Extra amount paid By consumers

7 P Q O QS2QS2 PwPw PtPt EU supply QS1QS1 Qd2Qd2 Qd1Qd1 EU demand Import levy Imports Minimum price where some of the product is imported Extra amount paid to farmers AMOUNT PAID IN IMPORT LEVIES to Govt AMOUNT PAID IN IMPORT LEVIES to Govt

8 But over time effect of subsidies and price floors means supply rises – so need to look at Minimum prices for a product where the country is self-sufficient P Q O PwPw S EU QS1QS1 Qd1Qd1 D EU a b Exports

9 P Q O PwPw PiPi S EU QS1QS1 Qd1Qd1 D EU a b Minimum prices for a product where the country is self-sufficient

10 P Q O QS2QS2 PwPw PiPi S EU QS1QS1 Qd2Qd2 Qd1Qd1 D EU a b d e Minimum prices for a product where the country is self-sufficient Surplus

11 P Q O QS2QS2 PwPw PiPi S EU QS1QS1 Qd2Qd2 Qd1Qd1 D EU a b c d e f Amount bought into intervention Minimum prices for a product where the country is self-sufficient Surplus

12 P Q O QS2QS2 PwPw PiPi S EU QS1QS1 Qd2Qd2 Qd1Qd1 D EU a b c d e f COST OF BUYING THE SURPLUS COST OF BUYING THE SURPLUS Minimum prices for a product where the country is self-sufficient Surplus

13 P Q O QS2QS2 PwPw PiPi S EU QS1QS1 Qd2Qd2 Qd1Qd1 D EU a b c d e f REVENUE FROM SALE OF SURPLUS ON WORLD MARKET REVENUE FROM SALE OF SURPLUS ON WORLD MARKET NET COST Minimum prices for a product where the country is self-sufficient Surplus

14 CAP EU was net importer of most food, so could support price via tariff:EU was net importer of most food, so could support price via tariff: –technically known as a variable levy. –Costs borne largely by consumers,

15 Effect of EU price supports and export subsidies on world market. BEFORE P Q O PwPw QWQW EU Imports +D ROW D EU = D W S EU S ROW SWSW ROW Exports

16 Effect of EU price supports and export subsidies on world market. AFTER P Q O PwPw EU Dumping D ROW D EU D W S EU S ROW SWSW S* W S* EU P EU P* W Dumping on ROW SEUSEU D EU Lower World Price Lower ROW World Supply V. Bad for poor ROW

17 Follow-on Problems of Oversupply EU switches from net food import to exporter in most products.EU switches from net food import to exporter in most products. Source; Baldwin and Wyplosz

18 The cost to the taxpayer of high fixed prices P Q O PePe S D

19 P Q O PePe PiPi S D

20 P Q O PePe PiPi S D b a QdQd QsQs Surplus The cost to the taxpayer of high fixed prices

21 P Q O PePe PiPi S D c b a d COST TO THE TAXPAYER COST TO THE TAXPAYER QdQd QsQs Surplus The cost to the taxpayer of high fixed prices

22 The cost to the taxpayer of subsidies P Q O PePe S D Q1Q1

23 P Q O PePe PfPf S D a b PcPc Subsidy Q1Q1 Q2Q2 The cost to the taxpayer of subsidies S2S2

24 P Q O PePe PfPf S D a b PcPc COST TO THE TAXPAYER COST TO THE TAXPAYER Q1Q1 Q2Q2 The cost to the taxpayer of subsidies

25

26 The cost of price and other market support for agriculture in the EU

27 AGRICULTURE AND AGRICULTURAL POLICY Justification of the CAPJustification of the CAP –assured supplies of food –support for farm incomes –growth in agricultural productivity –stable agricultural prices –reasonable prices for consumers

28 AGRICULTURE AND AGRICULTURAL POLICY Criticisms of the CAPCriticisms of the CAP –agricultural surpluses static costs static costs dynamic costs dynamic costs –irrational relative prices –removes disciplines of markets –redistributive effects

29 Other CAP Problems The farm income problem:The farm income problem: –average farm incomes fail to keep up despite huge protection and budget costs –most of money goes to big farms that dont need it: CAP makes some farmers/landowners rich CAP makes some farmers/landowners rich keeps average (i.e. small) farmer on edge of bankruptcy keeps average (i.e. small) farmer on edge of bankruptcy –farmers continue to exit farming (2 per cent per year).

30 Other CAP Problems Effects on the Environment:Effects on the Environment: Factory farming:Factory farming: –pollution –animal welfare –nostalgia. Bad for image and thus public support for CAP.Bad for image and thus public support for CAP. Effects on Rest of the WorldEffects on Rest of the World –Lowers Prices and supply –Affects poor countries very badly

31 AGRICULTURE AND AGRICULTURAL POLICY Possible reforms of the CAPPossible reforms of the CAP –price reductions –production quotas –set aside –diversification –low-intensity farming –income support –the MacSharry and other reforms

32 CAP Reforms Supply control attempts:Supply control attempts: –1980s, experimentation with ad hoc and complex set supply controls to discourage production –e.g. Milk quotas and cereal set-aside –generally failed; technological progress and high guaranteed prices overwhelmed supply controls.

33 CAP Reforms 1992: MacSharry Reforms:1992: MacSharry Reforms: –basic idea: cut prices supports to near world-price level and compensate farmers with direct payments –was essential to complete the Uruguay Round –worked well.

34 Effect of the MacSharry reforms on cereal surpluses P Q O P1P1 S1S1 D c b a d Original surplus Qs1Qs1 Qd1Qd1

35 P Q O P1P1 P2P2 S1S1 D c b a d Reduction in intervention price Qs1Qs1 Qd1Qd1 Effect of the MacSharry reforms on cereal surpluses

36 P Q O P1P1 P2P2 S1S1 D S2S2 c b a d Effect of Set-aside Qs1Qs1 Qd1Qd1 Effect of the MacSharry reforms on cereal surpluses

37 P Q O P1P1 P2P2 S1S1 D S2S2 Qs2Qs2 Qs1Qs1 Qd2Qd2 Qd1Qd1 c b a d a b c Reduced surplus Effect of the MacSharry reforms on cereal surpluses

38 Further CAP Reforms Agenda 2000Agenda 2000 –MacSharry Mark II, lower price floors and more de-linked direct payments –|Prices in 2002 only 73% of 1990 levels and more proposed –Rural development policy switching towards specialist provision (herbs, organics) and alternative local services and industry –Capped agriculture budget for first time

39 June 2003 Reforms; essential to Doha Round:June 2003 Reforms; essential to Doha Round: –implementation –Phase out price supports completely –Cap on contribution to large farms (EU 300K) –Cap on spending on new members 10 countries share 3.7 b -4.1 in 2006 –But average spend is 172 per farm in Easter Europe compared to 5000 in EU15

40 Evaluation of Todays CAP Supply problems and food mountains: left figure: massive shift to direct payments Source; Baldwin and Wyplosz

41 Evaluation of Todays CAP price cut reduced EU buying of food: right figure shows important drop in EU storage of food EU dumping of food on world market also dropped. Source; Baldwin and Wyplosz

42 Farm Incomes and CAP Support Inequity DIRECT PAYMENTSMostly to big, rich farmers:DIRECT PAYMENTSMostly to big, rich farmers: –payments intended to compensate, so inequity continued. Half the payments to 5 per cent of farms (the largest).Half the payments to 5 per cent of farms (the largest). Half the farms (smallest) get only 4 per cent of payments.Half the farms (smallest) get only 4 per cent of payments. Most payments also go to wealthy regionsMost payments also go to wealthy regions

43 Farm Incomes and CAP Support Inequity Recent studies show that only about half of these payments go to farmers:Recent studies show that only about half of these payments go to farmers: –rest to non-farming landowners and suppliers of agricultural inputs (seed, fertilisers, agri-chemicals, etc.) Should not be overly surprisingShould not be overly surprising

44 CAP Support Inequity Source; Baldwin and Wyplosz

45 Future Challenges Eastern Enlargement:Eastern Enlargement: –number of farms will rise from 7 million to 30 million –farmland rise from 130 million hectares to 170 million.

46 EU Newcomers: Farm Facts Source; Baldwin and Wyplosz

47 Doha Round WTO round: Doha Round WTO round: Agriculture keyAgriculture key Cairns Group Group Argentina Australia Bolivia Brazil Canada Chile Colombia Costa Rica Guatemala Indonesia Malaysia New Zealand Paraguay Philippines South Africa Thailand UruguayArgentina Australia Bolivia Brazil Canada Chile Colombia Costa Rica Guatemala Indonesia Malaysia New Zealand Paraguay Philippines South Africa Thailand UruguayArgentinaAustraliaBoliviaBrazilCanada ChileColombiaCosta RicaGuatemala IndonesiaMalaysiaNew ZealandParaguay PhilippinesSouth AfricaThailandUruguayArgentinaAustraliaBoliviaBrazilCanada ChileColombiaCosta RicaGuatemala IndonesiaMalaysiaNew ZealandParaguay PhilippinesSouth AfricaThailandUruguay Failure in Cancun after African countries walk-out.Failure in Cancun after African countries walk-out. EU now offering significant cutsEU now offering significant cuts


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