1. COMMON AGRICULTURAL POLICY OF THE EUROPEAN UNION

3. 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.

5. 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

7. Major Principles of the CAP
Market unity
Community preference
Financial solidarity

8. 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).

9. 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)

10. 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

11. 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

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

13. 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

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

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

16. 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)

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

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

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

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

21. 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’

23. CAP Reforms

24. 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

25. 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.

26. 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.

27. 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.

28. 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

29. Pillars of the CAP

30. 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.

31. 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).

32. 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.

35. 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.

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

41. 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

42. 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