CAP: history & future Niek Koning Wageningen University, Netherlands

Price volatility –Inelastic demand (small supply fluctuations have large price effects) –Supply fluctuations are unavoidable (wheather, but also ‘cobweb cycles’) –Speculation Recurrent oversupply –Fossil Fuel Revolution opened vast room for expanding food production –Lack of market power  competition forced farmers to overuse this room Risk of future scarcity –Depletion of land, water, P & room for breeding higher yielding varieties –Rising fossil fuel prices will make fertilizer expensive –Rising fossil fuel prices will boost demand for biofuels/materials Why regulate agricultural markets? Makes timely investment needed for soft landing Discourages investment

Price support –All founding countries already supported their farmers –Common price support should help ensure parity incomes –Instruments: Tariffs, intervention storage & export subsidies (grain, milk, beef) Price quotas (sugar) Gradual increase in structural policies –Eased integration of new countries Initial CAP

Lack of supply management  growing surpluses Costs of surplus dumping  budgetary crisis Struggles about solutions –Arable interests: “close Rotterdam loophole” –Many agro-industries: “lower price support” –Many farmers: “better use supply management” –Economists: “stop market intervention” Outcomes: –Milk: supply management  effective reduction of dumping –Grain: cutting on price support  dumping cheaper per ton but surpluses continued to grow 1980s: struggles about costs of dumping

Lack of supply management  growing surpluses Costs of surplus dumping  budgetary crisis Struggles about solutions –Arable interests: “close Rotterdam loophole” –Many agro-industries: “lower price support” –Many farmers: “better use supply management” –Economists: “stop market intervention” Outcomes: –Milk: supply management  effective reduction of dumping –Grain: cutting on price support  dumping cheaper per ton but surpluses continued to grow 1980s: struggles about costs Expenses EU price policy

EU-US trade ‘war’ –US dumping oil/protein products through Rotterdam loophole –EU dumping grain while free riding on US acreage reduction program Direct payments game –EU & US agreed that price support should be reduced worldwide while exempting direct payments (Blair House Agreement) By direct payments they could continue exporting below their cost of production Hope that global reduction in price support would create new export opportunities –This bilateral agreement was forced through the Uruguay Round and became the ‘Agreement on Agriculture’ –In the EU, its implementation was sold as a social/green policy 1990s: Uruguay Round Slow implementation of ‘cross-compliance’ and ‘modulation’ showed this to be a political expedient Thus they could scrub round GATT article XVI which bound export support to supply management

Proponents of dismantling –Neoliberal politicians –Agribusinesses dreaming of exports to Asia “Locking in the reforms” game –Remaining production controls are being dismantled –So support becomes fully dependent on export subsidies or direct payments Export subsidies are being banned in the WTO, so only direct payments are left –Direct payments are more expensive than price support –Post-2013 budget will be meagre while competing claims will increase West European farmers wanting payments to uphold their incomes East European farmers wanting their share of payments Citizens demanding fulfilment of social/green promises  more to 2 nd pillar –So cutting down the CAP becomes “unavoidable” 2000s: dismantling the CAP

Proponents of dismantling –Neoliberal politicians –Agribusinesses dreaming of expanding exports to Asia “Locking in the reforms” game –Remaining production controls are being dismantled –So support becomes fully dependent on export subsidies or direct payments Export subsidies are being banned in the WTO, so only direct payments are left –Direct payments are more expensive than price support –Post-2013 budget will be meagre while competing claims will increase West European farmers wanting payments to uphold their incomes East European farmers wanting their share of payments Citizens demanding fulfilment of social/green promises  more to 2 nd pillar –So cutting down the CAP becomes “unavoidable” 2000s: dismantling the CAP Lapperre & Silvis 2008

Short term: increased price volatility –Ending of US acreage reduction program exacerbated decline in grain prices after 1996 –Emptying of public buffer stocks exacerbated global food price spike in 2008 –Quota phase out exacerbated subsequent fall in milk prices Effects of reform Milk price projection European Commission (‘soft landing scenario’, EU price = 100) EU prices World prices

Short term: increased price volatility –Ending of US acreage reduction program exacerbated decline in grain prices after 1996 –Emptying of public buffer stocks exacerbated global food price spike in 2008 –Quota phase out exacerbated subsequent fall in milk prices Effects of reform Real milk price evolution (LTO/Gould) EU prices World prices

Short term: increased price volatility –Ending of US acreage reduction program exacerbated decline in grain prices after 1996 –Emptying of public buffer stocks exacerbated global food price spike in 2008 –Quota phase out exacerbated subsequent fall in milk prices Long term: Favoured regions will see a new round of scale enlargement Elsewhere agriculture will stagnate EU will contribute little to avoiding global scarcity in the future –Increased price volatility, cutting down price support and decreasing direct payments discourage investment Few farmers will invest in sustainable production methods Effects of reform NB: Will Europe dodge its global responsability? (It has 0.36 ha of agriculturally suitable land, against the rest of the world 0.26 ha)

Safety nets –Only defend a very low price floor Income insurance –Requires heavy subsidization –Amounts to subsidized dumping (smart countervailing payments) Futures markets –Reduce short-term price risk, but not price volatility Contracts & collective bargaining –Little effect on grain/beef/milk prices without supply management Ineffective remedies

Short term: Make prices remunerative for reasonably efficient farmers −Return to tariff protection and supply management Use direct payments only for less favoured regions & green services –Budget costs will strongly decrease Ensure sustainability by minimum norms rather than cross-compliance Longer term: Negotiate closure of Rotterdam loophole Work for multilateral arrangements that stabilize prices –Buffer stocks managed by supra-national organization –Use trade quotas on high/middle-income countries when stocks overflow –Restrict agricultural biomass for non-foods when stocks are depleted Other options open to the EU WTO rules leave enough room for this

It’s all a question of political will… Thanks for your attention