COMMON AGRICULTURAL POLICY OF THE EUROPEAN UNION

What 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.

Short History In 1957, when the Rome Treaty established the EEC, World War II memories of food shortages were still fresh In 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 Commission CAP came into force in 1962

Major Principles of the CAP Market unity Community preference Financial solidarity

Objectives of the CAP to 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).

Why is Agriculture Different? Continuous demand food availability indispensable on a daily basis total food demand is income and price inelastic Discontinuous supply land and farm labour are fixed in time & space weather-induced major uncertainties biological cycles in production (e.g., beef, olive oil) unexpected shocks (diseases, natural disasters etc) Result: volatility of prices (and consequently of farmers’ income)

Functioning of the CAP Public 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 price Production quotas (e.g. sugar) Subsidies for storage Tariffs and export subsidies

Price support mechanism Varies with each product eg cereals Sets Target price, Threshold price and Intervention price Target 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 supply Set by Commission

P S Target price Ptarg Pe Pw World price * D Q cereal * Assumptions

Variable levy (VL) (import tax) Threshold price (Pth) the minimum price level that imported agricultural products can enter the EU market Aim: protect EU farmers against foreign competition Variable levy (VL) (import tax) Pth minus lowest world price Calculated daily VL raised if Pw fell Revenue source

P S Target price Ptarg * Pth Threshold price Pw World price D Q cereal * Transport & storage

P S Target price Ptarg * Pth Threshold price Variable levy Pw World price D Q cereal * Transport & storage

Intervention price (Pinv) Minimum price as 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 supply Given to producers whatever they do Pinv changes over season (as do other prices)

P S Target price Ptarg * Pth Threshold price Pinv VL Pw World price D Q cereal

P S Target price Ptarg * Pth Threshold price surplus Pinv VL Pw World price D Q cereal

Export subsidy(restitution) Pinv - Pw Influenced by several factors Rest of world

P S Target price Ptarg * Pth Threshold price Pinv Export sub VL Pw World price D Q cereal

CAP: 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 consumers Environment Pressure from WTO Farmers become ‘rent seekers’

CAP Reforms

Early Attempts: Mansholt Plan 1968: Sicco Mansholt, the European Commissioner for Agriculture offered the'1980 Agricultural Programme‘ Suggested that production methods should be reformed and modernised Aim 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 farms Called on the Member States to limit direct aid to unprofitable farms angry reaction of the agricultural community, scope limited to modernisation

MacSharry Reforms 1992: European Commissioner for Agriculture, Ray MacSharry need 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.

MacSharry Reforms created ‘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.

Agenda 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.

Agenda 2000 Reforms divided the CAP into two 'Pillars': production support and rural development aimed 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

Pillars of the CAP

Rural Policy Modernising 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.

2003 Fischler Reforms led 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).

2008 Reforms: Health Check Further 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.

In 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.

The EU spends around €55 bn a year on farm subsidies. farmsubsidy.org helps people find out who gets what, and why.

Future of CAP: Further Reform Proposals Better targeted income support in order to stimulate growth and employment Tools to address crisis management which are more responsive and better suited to meet new economic challenges A ‘Green’ payment for preserving long-term productivity and ecosystems Additional investment in research and innovation A more competitive and balanced food chain

Future of CAP: Further Reform Proposals Encouraging agri-environmental initiatives Facilitating the establishment of young farmers Stimulating rural employment and entrepreneurship Better addressing fragile areas A simpler and more efficient CAP