1. Common Agricultural Policy
Jan Fidrmuc
Brunel University

2. 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

3. 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)

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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.

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

12. 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

13. 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

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

15. 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
Similar to MacSharry reforms in spirit.

16. CAP Today Two pillar structure:
Direct payments and price support
Rural Development
: 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

18. 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?”

19. CAP supports inequity