Common Agricultural Policy Jan Fidrmuc Brunel University

CAP CAP started as simple price support policy in 1962. Motivation: to support rural areas and farmers and to ensure European countries produced enough food locally EU was net importer of food so it could support prices by imposing a tariff (‘variable levy’). At present, CAP accounts for close to 1/2 of EU budget EU now is net exporter of agricultural products and most CAP expenditure is on subsidies to farmers

Simple price support with tariff Home Demand Home Supply Home Demand Home Supply price price pss Price floor (Pw+T, or Pw’+T’) Price floor T’ T A B Pw’ C1 C2 Pw Pw Imports (with floor) Q Q Z Zf Cf C Z Zf Cf C Imports (without price floor)

Welfare Effects Consumer surplus falls by A+ C1+C2+B Home Demand Home Supply Consumer surplus falls by A+ C1+C2+B Producer surplus rises by A In addition, the EU as a whole gains tariff revenue (not shown here) price Price floor A B C1 C2 Pw Q Z Zf Cf C

Distributional Implications price price price Family farm supply curve Commercial farm supply curve Total supply curve Pw+T Asmall Abig Atotal Pw B Q Q Zsmall Zbig Ztotal Q Large and more efficient farms tend to gain more from CAP than small inefficient farms Most of the gains accrue to those who are already rich

Farm size distribution in 1987 Very skewed ownership: Biggest 7% of farmers owned ½ of the land. Smallest 50% of farmers owned only 7% of the land. Farm size class (hectares) Number of farms (millions) Number of farms as share of total Share of EU12 farm land in size class Average farm size (hectares) 1 to 5 3.411 49.2% 7.1% 2.4 5 to 10 1.163 16.8% 7.0 10 to 20 0.936 13.5% 11.5% 14.1 20 to 50 0.946 13.7% 25.7% 31.2 over 50 0.473 6.8% 48.6% 117.6 total 6.929 100% 115 (mill.ha) 16.5

CAP Problems: Supply ‘Green revolution’: technological improvements in agriculture Agricultural output increased rapidly, faster than consumption EU went from being a net importer of agricultural products to producing more than in needed Solution 1: EU buys surplus output and ‘stores’ it Solution 2: Surplus output is exported; this requires subsidies since the EU price floor exceeds the world price  dumping

S’ Pw Cf Zf price price S1 S2 S3 S4 Home Supply Demand p1ss p2ss Price floor p3ss S’ B A a b c Price floor d e C1 C2 p4ss Pw EU purchase Home Demand Q Q Cf Zf

CAP Problems: Oversupply EU switches from being net importer to net exporter in most agricultural products.

CAP Problems: World market impact EU is a major food buyer. World MD shifts in (EU does not import food) Some of EU surplus output is dumped on world market: world MS shifts out CAP protection and dumping depresses prices on world markets. This harms non-EU food exporters/producers.

CAP Problems: Budget Buying and storing or dumping food increasingly expensive. EU no longer imports agricultural products  no tariff revenue.

Other CAP Problems Most of money goes to big farms Small farmers continue to exit farming (see graph) Nostalgia: family farms disappear Pollution Animal welfare

Solution: Decoupling Subsidies paid regardless of production World price allowed to prevail: supply falls and consumption rises Welfare effect Consumers gain: a+b Farmers lose: -(a+b+c) Budgetary savings: b+c+d Net effect: b+d Oversupply eliminated Farmers may need to be compensated for their losses

Solution: Decoupling EU demand EU supply, S1 price surplus Q price World Price EU supply, S1 EU demand EU demand a b Z Z’ Price Floor World Price + T d c surplus

CAP Reforms Supply control attempts: 1992: MacSharry Reforms: 1980s, experimentation with ad hoc supply ‘controls’ to discourage production. Generally failed; technological progress & high guaranteed prices overwhelmed supply controls. 1992: MacSharry Reforms: Basic idea: CUT PRICES to near world-price level & COMPENSATE farmers with direct payments. Worked well. June 2003 Reforms Implementation 2004-2007. Similar to MacSharry reforms in spirit.

CAP Today Two pillar structure: Direct payments and price support Rural Development 2007-2013: increasing role of second pillar Single Payment Scheme Based on historical payments in EU15 Money per hectare in new member states with amount limited by national ceilings Areas covered by second pillar: Quality incentives and support to meet standards and covering of animal welfare cost, technical advice Improving agricultural competitiveness, sustainable land management, improving quality of life in rural areas

Farm incomes & CAP inequity Reformed CAP support still goes mostly to big farmers. payments intended to compensate, so inequity continued. Half the payments to 5% of farms (the largest). Half the farms (smallest) get only 4% of payments. 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.) See: “Who Finances the Queen’s CAP payments?” http://shop.ceps.be/BookDetail.php?item_id=1285

CAP supports inequity