CAP reforms Economics of Food Markets Lecture 8 Alan Matthews

Objectives To discuss the elements and significance of: –The 1992 MacSharry reform –[1994 conclusion of the Uruguay Round] –The 1999 Agenda 2000 reform –The 2003 Mid-Term Review (Luxembourg Agreement)

Reform landmarks 1968 the Mansholt Plan 1977 prudent pricing policy and abandonment of the 'objective method' of price setting 1984 milk quotas 1988 agricultural stabilisers 1992 MacSharry reform 1999 Agenda Commission's proposals for the Mid-Term Review of Agenda Luxembourg Agreement (ongoing reforms in sugar, Mediterranean products and fruit and vegetables)

MacSharry reform MacSharry reforms cut support prices for cereals (29%) and beef (15%) in return for increased direct payments as compensation to farmers First time nominal cuts in support prices were introduced Accompanying measures Consequences –Greatly increased significance of direct payments –Extended role of supply management policies –Initial over-compensation of farmers –Permitted Uruguay Round to be concluded

Uruguay Round Agreement 1994 –Disciplines on agricultural support policies were a key negotiating item in the Uruguay Round of trade negotiations launched in 1986 –Final agreement 1994 Converted import barriers into tariffs and reduced them by 36% Set limits on the volume and value of export subsidies Set and bound ceilings on the total amount of trade- distorting support each country could provide to its farmers

Post-GATT Uruguay Round CAP mechanisms export subsidy world price threshold price intervention price target price ImportInternalExport Volume and value capped and reduced over time Domestic support capped and reduced over time tariffs fixed and reduced over time

Agenda 2000 Part of wider EU package to prepare for enlargement But also to prepare EU for further round of WTO talks as well as integrate environmental and rural development concerns New statement of agricultural policy objectives –Greater emphasis on the promotion of the European model of agriculture –Rationale for farm transfers changing from income support to remuneration for provision of ‘multifunctional’ public goods

Agenda 2000 Further reductions in support prices for cereals (15%), beef (20%) and, for the first time, milk (15%), again with increased partial compensation to farmers Stronger emphasis on rural development as ‘second pillar’ of the CAP to complement the ‘first pillar’ of market price support Tight budget limits established on CAP expenditure As negotiations proceeded, overall gain to Ireland

Commission’s 2002 Mid-Term Review proposals CMO changes (mainly in arable sector) Dairy regime Decoupling of direct payments Strengthened eco-conditionality Modulation of direct payments from first to second pillars

Decoupling: rationale Simplification of payment arrangements Encourages greater market orientation Reduces pressure on environment through intensification Improves efficiency of income transfer to farmers Makes it easier to extend CAP to accession countries Makes it easier to defend payments in WTO

Decoupling: the mechanics Paid irrespective of production –Though subject to requirement that land is maintained in good condition –Eventual agreement allowed some partial coupling to be retained Eligibility determined by payments received in a reference year

Decoupling: the options Start date: After Jan 2005 but Jan 2007 by latest Design –Basic (historic) approach –Regional (flat rate) approach –Mixed models (static and dynamic hybrids) Level of pasture must be maintained Not allowed to grow permanent crops, fruits and vegetables, ware potatoes on eligible land New Member States have option to continue with Single Area Payment Scheme (uniform payment per ha of agricultural land)

Decoupling: the options Partial decoupling allowed under strict conditions –Cereals (25% of arable aid); Beef (100% suckler cow premium, up to 40% of slaughter premium), Sheep 50% of ewe premium –Olive oil and cotton Payment entitlements can be transferred Financial discipline mechanism

Modulation: budget rebalancing Problem was how to increase funding of the second pillar within constraint of fixed overall agricultural budget Modulation already introduced as voluntary option for MS in Agenda 2000 Commission’s proposal to make modulation compulsory opposed: –Leads to redistribution within farming –Leads to redistribution between member states –Countries find it difficult to find the counterpart funds –Second pillar schemes have high transactions costs –Agricultural Ministers not necessarily keen on second pillar spending –Problems in finding sufficient worthwhile rural development projects

Eco-conditionality Already introduced in Agenda 2000, but suspicions about the commitment of Member States to enforcing this Proposals cover: –The scope of standards: to cover environmental, food safety, animal health and welfare, occupational safety –The level of standards: meeting mandatory standards or applying good farming practice? The monitoring of standards: introduction of farm audits –Mandatory for producers receiving more than $5,000 in direct payments –Financial aid for audits to be available

Decoupling: the effects Output effects –By how much will output fall Environmental benefits arise through more extensive production… …but danger of land abandonment in marginal farming areas Long term sustainability?

Mid-Term Review The story continues…. –Mediterranean products (2003) –Sugar (2005) –Fruits and vegetables (2006) Explanatory guide – Department of Agriculture and Food website European Commission DG Agriculture and Rural Development website