Common Agricultural Policy

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The Common Agricultural Policy (CAP) is a system of European Union agricultural subsidies which represents about 44% of the EU's budget (€43 billion scheduled spend for 2005 [link]). These subsidies work by guaranteeing a minimum price to producers and by direct payment of a subsidy for crops planted. This provides some economic certainty for EU farmers and production of a certain quantity of agricultural goods. Reforms of the system are currently underway including a phased transfer of subsidy to land stewardship rather than specific crop production from 2005 to 2012. Detailed implementation of the scheme varies in different member countries of the EU.

Contents

Beginnings of the CAP

Sectors covered by the CAP
The common agricultural policy price intervention covers only certain agricultural products:

cereal, rice, potatoes
oilseeds
dried fodder
milk and milk products, wine, honey
beef and veal, poultry meat and eggs, pig meat, sheep / lamb meat and goat meat
sugar
fruit and vegetables
cotton
peas, field beans
sweet lupins
olive oil
seed flax
silkworms
fibre flax
hemp
tobacco
hops
seeds
flowers and live plants
animal feed stuffs

The coverage of products in the external trade regime is more extensive than the coverage of the CAP regime. This is to limit competition between EU products and alternative external goods (for example, litchi juice could potentially compete with orange juice).

The creation of a common agricultural policy was proposed in 1960 by the European Commission. It followed the signing of the Treaty of Rome in 1957, which established the Common Market. The six member states individually strongly intervened in their agricultural sectors, in particular with regard to what was produced, maintaining prices for goods and how farming was organised. This intervention posed an obstacle to free trade in goods while the rules continued to differ from state to state, since freedom of trade would interfere with the intervention policies. Some Member States, in particular France, and all farming professional organisations wanted to maintain strong state intervention in agriculture. This could therefore only be achieved if policies were harmonised and transferred to the European Community level.

By 1962, three major principles had been established to guide the CAP; market unity, community preference and financial solidarity. Since then, the CAP has been a central element in the European institutional system.

The CAP is often explained as the result of a political compromise between France and Germany: German industry would have access to the French market; in exchange, Germany would help pay for France's farmers.

Objectives

The initial objectives were set out in Article 39 of the Treaty of Rome:

to increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour;
to ensure a fair standard of living for the agricultural Community;
to stabilize markets;
to secure availability of supplies;
to provide consumers with food at reasonable prices.

The CAP recognised the need to take account of the social structure of agriculture and of the structural and natural disparities between the various agricultural regions and to effect the appropriate adjustments by degrees.

How the CAP works

The CAP is an integrated system of measures which works by maintaining commodity price levels within the EU and by subsidising production. There are three principal mechanisms:

Import Tariffs are applied to specified goods imported into the EU. These are set at a level to raise the World market price up to the EU target price. The target price is chosen as the maximum desirable price for those goods within the EU.

An internal intervention price is set. If the internal market price falls below the intervention level then the EU will buy up goods to raise the price to the intervention level. The intervention price is set lower than the target price. The internal market price can only vary in the range between the intervention price and target price.

Subsidies are paid to farmers growing particular crops. This was intended to encourage farmers to choose to grow those crops attracting subsidies and maintain home-grown supplies. Subsidies were generally paid on the area of land growing a particular crop, rather than on the total amount of crop produced. Current reforms of the system now underway are phasing out specific crop subsidies in favour of flat-rate subsidies based only on the area of land in cultivation, and in return for adopting environmentally beneficial farming methods. This will reduce, but not eliminate, the economic incentive to overproduce.

The change in subsidies is intended to be accomplished by 2012, but individual governments have freedom to decide how the new scheme will be introduced. The UK government has decided to run both systems of subsidy together, each year transferring a larger proportion of the total payments to the new scheme. Other governments have chosen to wait, and change the system at the latest possible time.

The CAP also makes use of external trade policy. Some non member countries have negotiated quotas which allow them to sell particular goods within the EU without tariffs. This notably applies to countries which had a traditional trade link with a member country.

The CAP also aims to promote legislative harmonisation within the Community. Differing laws in member countries can create problems for anyone seeking to trade between countries. Examples are regulations on permitted preservatives or coloring agents in foods, labelling regulations, use of hormones or other drugs in livestock intended for human consumption and disease control (e.g. during the foot and mouth disease outbreak in the United Kingdom, Ireland and the Netherlands), animal welfare regulations. The process of removing all hidden legislative barriers to trade is still incomplete.

The CAP is funded by the European Agricultural Guidance and Guarantee Fund (EAGGF) of the EU. CAP reform has steadily lowered its share of the EU budget but it still accounts for nearly half EU expenditure. In recent years France has benefited the most from these subsidies. The new accession countries which joined the EU in 2004 have large farm sectors and would have overtaken France as chief beneficiary, but for transitional regulations limiting the subsidies which they receive. The continuing problem of how subsidies for these countries will be paid when they become eligible has already led to French concessions on reform of the CAP. Further concessions will inevitably be necessary to balance the budget.

Problems of the CAP

Anti-development

Criticism of the CAP has united some supporters of globalization with the anti-globalization movement in that it is argued that these subsidies, like those of the USA and other Western states, add to the problem of what is sometimes called Fortress Europe; the West spends high amounts on agricultural subsidies every year, which amounts to unfair competition. The OECD countries' total agricultural subsidies amount to more than the GDP of the whole of Africa.

Moreover it is argued that in creating an oversupply of agricultural products which are then sold in the Third World and simultaneously preventing the Third World from exporting its agricultural goods to the West, the CAP increases Third World poverty by putting Third World farmers out of business. According to the Human Development Report 2003 in 2000 the average dairy cow in the EU received $913 in subsidies, compared with an average of $8 per person in Sub-Saharan Africa.

Rural environment

The CAP is seen as a social tool to assist economically deprived areas and preserve the rural environment. Changes in the last decade began to switch subsidy towards land set aside out of cultivation and for improving the rural landscape. Current changes to the system have switched money away from payments for planting specific crops to flat-rate payments for any land capable of cultivation. This is intended to encourage alternative non-production land use and allow farmers more freedom in choosing crops. A maximum amount was proposed on the subsidy payable to any single farm. This seeks to increase the proportion going to smaller farmers, though the largest single amounts continue to go to those who already have the scale benefits of large operations. 80% of funds go to the largest 20% of farmers, while the smallest 40% get only 8% of funds.

There is a significant public will for land to be maintained in its current state for recreational purposes. This essentially means that people are willing to pay farmers a subsidy simply to maintain the landscape. Such benefit is difficult to quantify when assessing the 'cost' to the EU of farm subsidy.

Artificially high food prices

CAP price intervention causes artificially high food prices throughout the EU. Some have suggested that Europeans pay about 25% higher prices for food than they would without the CAP, whereas the Timbro research institute has counted figures reaching over 80%[link]. Some commodities have even more inflated prices: European sugar costs more than three times the global market price. This subsidy is estimated to cost each EU citizen on average £16 or €24 per week although intervention costs and subsidy are decreasing.

As a consequence of these artificial high food prices European consumers pay a regressive consumption tax. In general, the fraction of income spent on food products tends to increase as income decreases, as everyone has to eat at least a minimum of food. Because the relative spending on food is higher among the lower income classes, they pay relatively more taxes than higher income classes. (Baldwin & Wyplosz, The Economics of European Integration, McGraw-Hill Education, Maidenhead (Berkshire), 2004, pp. 218-219.)

Equity among member states

Some countries in the EU have larger agricultural sectors than others, notably France, Spain, and Portugal, and consequently receive more money under the CAP. Other countries receive more benefit from different areas of the EU budget. Overall, certain countries make net contributions, notably Germany (the largest contribution overall) and the Netherlands (the biggest contribution per person), but also the UK and France. The UK would have been contributing considerably more, except that Margaret Thatcher successfully negotiated a special annual UK rebate in 1984. Without the rebate the UK was the largest contributor despite being the third poorest member state.

As of 2004, France gets 13% more of CAP funds than the UK (as a % of total funds - see diagram). This is a net benefit that France gets compared to the UK of €6.37 billion.[link] This is largely a reflection of the fact that France has more than double the land area of the UK, while the size of Germany is mid-way between the two. In comparison, the UK budget rebate for 2005 is scheduled to be approx €5.5 billion. [link]. The popular view in the UK (as, for example, set forth in the tabloid press) is that if the UK rebate were reduced with no change to the CAP, then the UK would be paying money to keep an inefficient French farming sector in business - to many British people, this would be seen as grossly unfair. French motives for generating arguments about "solidarity" and "selfishness" are therefore seen as extremely self-serving.

If the rebate were removed without changes to the CAP then the UK would pay a net contribution of 14 times that of the French (In 2005 EU budget terms). The UK would make a net contribution of €8.25 billion compared to the current contribution of €2.75 billion, versus a current French net contribution of €0.59 billion. France has a slightly lower GDP than the UK, and its higher population means that it earns slightly less per person compared to the UK. Germany has a GDP approximately 25% higher than either France or the UK, but per capita income is comparable to the other two countries. France makes a net payment into the EU budget, so it cannot be said that it receives a subsidy from any other country. Rather, France, Germany and the UK all contribute towards funding of CAP subsidies to other member states, France contributing the least of the three. Due to the way the rebate is funded, France pays the largest share of the rebate (31%), followed by Italy (24%) and Spain (14%). [link] [link] [link]

In December 2005 the UK agreed to give up approximately 20% of the rebate for the period 2007-2013, on condition that the funds did not contribute to CAP payments, were matched by other countries contributions and were only for the new member states. Spending on the CAP remained fixed, as had previously been agreed. Overall, this reduced the proportion of the budget spent on the CAP. It was agreed that the European Commission should conduct a full review of all EU spending. [link][link]

State intervention

Some major critics of the Common Agricultural Policy reject the idea of protectionism, either in theory, practice or both. Free market advocates are among those who disagree with government intervention because, they say, a free market without interference will allocate resources much more efficiently. Subsidies allow many small farms to continue to operate which would not otherwise be viable. A straightforward economic model would suggest that it would be better to allow the market to find its own price levels, and for uneconomic farming to cease. Resources used in farming would then be switched to more productive operations.

Sustainability

Many economists believe that the CAP is unsustainable in an enlarged EU. The inclusion of ten additional countries on May 1, 2004 has obliged the EU to take measure to limit CAP expenditure. Poland is the largest new member with a land area greater than that of the UK though smaller than Germany, and has two million smallhold farmers. It is significantly larger than any of the other new members, but taken together the new states represent a significant increase in recipients under the CAP. However, reform of the programme has proven difficult because of political constraints in the form of strong agricultural lobbies.

Reforming the CAP

Overview

The CAP has always been a difficult area of EU policy to reform; this is a problem that began in the 1960s and one that continues to the present day, albeit less severely. It can be described as a "path dependant" institution due to the institutional make-up of the policy; the Agricultural Council is the main decision-making body for CAP affairs and is dextrously manipulated by those states that hold the CAP most dearly, such as France. Above all, however, unanimity is needed for most serious CAP reform votes, resulting in rare and gradual change. Outside Brussels proper, the farming lobby's power has been a factor determining EU agricultural policy since the earliest days of integration. Once a mighty force to be reckoned with, this lobby's power has decreased markedly since the 1980s, but even today, some attempts at reform are stymied by this group.

In recent times, however, change has been more forthcoming, due to external trade demands and the intrusion in CAP affairs by other members of the EU policy framework, such as consumer advocate working groups and the environmental departments of the Union. In addition Euroscepticism in states such as the UK and Denmark is fed in part by the CAP, which is actually detrimental to their economies.

Helping to keep the CAP intact, though, is the normative background of the policy. Farming is regarded as "special". A part of Europe's shared heritage is farming, food production and even fine dining; all of these are used as rationales for keeping the CAP strong. It is not simply just another industry, hence its massive presence in the EU psyche (and the EU budget.) Finally, the aim of self-sufficiency and a "shared larder" in Europe, a particularly salient concern in the post-war years, lingers to this day.

Pre-1992

With the above in mind, it is clear that reform was as infrequent as it was underwhelming until fairly recently. Early attempts at reforms, such as the Mansholt Plan, tended to fail. The Mansholt Plan was a 1960s idea that sought to remove small farmers from the land and to consolidate farming into a larger, more efficient industry. Farming's special status, and above all the extremely powerful farming lobbies across the Continent saw the Plan disappear from the Union's objectives.

Bruised by the failure of Mansholt, would-be reformers were mostly absent throughout the 1970s, not least due to the various financial crises that rocked the union in this decade, such as oil supply problems and the depression in the United Kingdom. A system called "Agrimoney" was introduced as part of the fledgling EMU project, but was deemed a failure and did not stimulate further reforms.

The 1980s was the decade that saw the first true reforms of the CAP, foreshadowing further development from 1992 onwards. The influence of the farming bloc declined, and with it, reformers were emboldened. Environmentalists garnered great support in reining in the CAP, but it was financial matters that ultimately tipped the balance: due to huge overproduction the CAP was becoming expensive and wasteful. These factors combined saw the introduction of a quota on dairy production in 1984, and finally, in 1988, a ceiling on EU expenditure to farmers. However, the basis of the CAP remained in place, and not until 1992 did CAP reformers begin to work in earnest.

1992

In 1992, the MacSharry reforms (named after the European Commissioner for Agriculture, Ray MacSharry) were created to limit rising production, while at the same time adjusting to the trend toward a more free agricultural market. The reforms reduced levels of support by 29% for cereals and 15% for beef. They also created 'set aside' payments to withdraw land from production, payments to limit stocking levels, and introduced measures to encourage retirement and forestation.

Since the MacSharry reforms cereal prices are closer to the equilibrium level, there is greater transparency in costs of agricultural support and the 'de-coupling' of income support from production support has begun. However, the administrative complexity involved invites fraud, and the associated problems of the CAP are far from being corrected.

It is worth noting that one of the main catalysts behind the 1992 reforms was the need to pacify the EU's external trade partners at the Uruguay round of the GATT trade talks with regards to agricultural subsidies. This set the tone for later reforms which were more often than not direct responses to external pressures on the Union, as opposed to a genuine and spirited response to the various anti-CAP groups existing within the EU.

2003

On 26 June 2003, EU farm ministers adopted a fundamental reform of the CAP, based on almost entirely "decoupling" subsidies from a particular crop. (Though Member States may choose to maintain a limited amount of specific subsidy.) The new "single farm payments" are linked to respect for environmental, food safety and animal welfare standards. The aim is to make more money available for environmental, quality or animal welfare programmes by reducing direct payments for bigger farms.

Details of the UK scheme were still being decided at its introductory date of May 2005. Details of the scheme in each member country may be varied subject to outlines issued by the EU. In the UK the single payment scheme provides a single flat rate payment of around £230 per hectare for maintaining land in cultivateable condition. This will be phased in from 2005 to 2012 such that each year an increasing proportion of subsidy is paid under the new scheme. The remaining proportion will be paid under the pre-2005 scheme which provided different subsidies for different crops. The new scheme allows for much wider non-production use of land which may still receive subsidy. Additional payments are available if land is managed in ecologically friendly ways.

The overall EU and national budgets for subsidy have been capped. This will prevent growth in the total bill to the taxpayer.

The reforms enter into force in 2004-2005. (Member States may apply for a transitional period delaying the reform in their country to 2007 and phasing in reforms up to 2012) [link]

EU expansion 2004

The expansion of the EU in 2004 increased the number of farmers from 7 to 11 million, increased the agricultural land area by 30% and crop production by 10-20%. The 2004 entrants into the EU have immediate access to price support measures (export refunds, intervention buying). However direct payments will be phased in over 10 years (2004-2013), starting at 25% of the rate paid to existing countries in 2004, and 30% for 2005. The 2004 entrants to the EU have access to a rural development fund (for early retirement, environmental issues, poorest areas, technical assistance) with a €5 billion budget. EU states agreed in 2002 that agricultural expenditure up to 2013 should not increase in real terms. This will require a cut in subsidies to the original states of around 5% to finance payments to the new members. Romania and Bulgaria may join in 2007, which would increase the required cut to 8%.

The current areas that are issues of reform in EU agriculture are: lowering prices, food safety and quality, and stability of farmers' incomes. Other issues are environmental pollution, animal welfare, and finding alternative income opportunities for farmers. Some of these issues are the responsibility of the member states.

European Commission Report

A 2003 report, commissioned by the European Commission, by a group of experts led by Belgian economist André Sapir stated that the budget structure was a “historical relic”.[link] The report suggested a rethink of EU policy, redirecting expenditure towards measures intended to increase wealth creation and cohesion of the EU. As a significant proportion of the budget is currently spent on agriculture, and there is little prospect of the budget being increased, this would necessitate reducing CAP expenditure. The report largely concerned itself discussing alternative measures more useful to the EU, rather than discussing the CAP, but it did also suggest that farm aid would be administered more effectively by member countries on an individual basis.

The report's findings were largely ignored. Instead, CAP spending was kept within the remit of the EU - and France led an effort to agree a fixed arrangement for CAP spending that would not be changed until 2012. This was made possible by advance agreement to this approach with Germany. It is this agreement that the UK currently wishes to see re-opened, both in their efforts to defend the UK position on the UK rebate and also given that the UK is in favour of lowering barriers to entry for third world agricultural exporters. [link]

Sugar regime reform 2005

One of the crops subsidised by CAP is sugar, produced from sugar beet; the EU is by far the largest sugar beet producer, with annual production 16 million to 18 million metric tons. This compares to the levels produced by Brazil and India (the two largest producers of sugar from sugar cane).[link]

Sugar was not included in the 1992 MacSharry reform, or in the 1999 Agenda 2000 decisions; sugar was also subject to a phase-in (to 2009) under the Everything But Arms trade deal giving market access to least developed countries. In 2005 the European Union agriculture ministers are planning to cut the minimum beet price by 39% from 2006, over four years[link]. Under the Sugar Protocol to the Lome Convention, nineteen ACP countries export sugar to the EU[link], and will be affected by price reductions on the EU market.

These proposals followed the WTO appellate body largely upholding on 28 April 2005 the initial decision against the EU sugar regime.[link]

2006 reforms

As of 21 February 2006, the EU has decided on some reforms of sugar subsidies. The guaranteed price of sugar is to be cut by 36%, with European production projected to fall sharply as a result of this. According to the EU, this is the first serious reform of sugar under the CAP for 40 years. [link]

An aim of this policy change is to allow easier and more profitable access to European markets for emerging economies. Critics, such as "EUPolitix", contend that this is not an altruistic move nor an idealistic shift from the EU, who are instead acting only in accordance with the wishes of the WTO, who supported challenges on sugar dumping by the EU from Australia, Thailand and Brazil. Another point of contention is that those countries who currently receive preferential treatment from EU member states - often due to colonial ties - as part of the ACP group may stand to lose out. [link]

External links

[a public health point of view on CAP]
[Citizen CAP]
[European Commission: Agriculture]
[European Union: Agriculture]
[EU Report on effects of expansion of the EU on farm production]
[farmsubsidy.org] Search data on CAP payments obtained by freedom of information requests.
[LADSS - CAP Reform]: Case study analysis of the impact of CAP
[New Zealand's hardy farm spirit] from BBC correspondent John Pickford
[Green and Pleasant Land]

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