Development of the CAP

Jorge NunezCEU

Master course Economics

Rich countries support agriculture Poor countries tax agriculture. The richer the country the less it is

taxed until it is subsidised. Mainly tariff barriers Small rich countries have even higher

protection than EU and US Exception: Australia and New Zeeland Main focus US and EU as these are big

traders and have a trade impact

Treaty of the EU has objectives

Since 1958 Article 39  - The objectives of the common agricultural policy shall

be:

1. to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour;

2. thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture;

3. to stabilize markets;4. to assure the availably of supplies;5. to ensure that supplies reach consumers at reasonable prices.

The objectives are still valid… because these are open to interpretation

Europe 2020 strategy: support the sustainable management of natural resources and climate action; support balanced territorial development throughout Europe.

The First… disastrous decisions Despite all of the objectives of the CAP only one

policy instrument was introduced: Price support The Commissioner of Agriculture at the time Sicco

Mansholt proposed a stronger farm restructuring policy instead, which was weakened by the EC leaders.

The consequences of the price support policy are still affecting the EU today and its relationships with third countries.

Why only price support Supporting prices has been main protection tool

of OECD countries, with different mechanisms. Tariffs, import quotas, deficiency payments… but the EU stands out for its methods.

The objective 5 “reasonable prices for consumer” is and was ignored, what is “reasonable”?

Why price support? What was the problem with farm incomes?

Main concern was the Engel’s law for food products.

Engel’s law from Engel curve

Ernst Engel (1857)

Price support - impacts Normal countries use tariffs… Not the EC… The EC had intervention prices and variable

levies (variable taxes) until after 1992. Intervention prices follow the ‘stabilisation of

markets’ objective. The state buys the production if the prices fall

below the intervention price. Variable levy (also called “threshold price”).

Contrary to a tariff levied on an imported good, price of good + tariff. The EC levy = price of good + whatever necessary to get to threshold price. The world price can move up and down, but has no effect.

Idea:Price

Pw

SEU

ThP

DEC

Pi

Encourages productivity?... Or

production

QuantityFarm incomes should

increase… did they?

Idea was that if in good years there is excess production, ECbuys and uses the excess in bad years to avoid prices Over ThP if there is a shortage.

Happened ONCE.Tariff

revenue

What happenedPrice

Pw

SEU

ThP

DEC

Pi

Quantity

SEU’

Strong rapid intensification in just a few years

Export subsidy

Production and costs spiral out of control

Price support does not increase farm incomes effectively, as price transmission low – OECD estimated that only 23% (land owners) and 13% (land tenants) of the price support went through.

The Agricultural Council of Ministers repeatedly increased Pi and Plv, reinforcing the spiral up in production.

The export subsidy and intervention purchasing was increasing costs strongly…. And tariff revenue (one of the main EC own revenues) fell.

EC was dumping production and destroying food

Effect on world price (see Lecture 1)

As a very big producer EU depressed world prices due to a fall in demand of the EU and an increase in world supply, (also American deficiency prices did affect Pw negatively)

Developing countries, but also Australia and New Zeeland that eliminated distorting subsides started pressurising EU.

Agriculture that was not part of GATT (General Agreement on Tariffs and Trade) entered in GATT leading to the 1992 landmark agreement (Uruguay Round)

America’s deficiency payments The US also subsidises agriculture. It lets the internal price be set by the market,

farmers are paid a deficiency payment (based on an “ideal market price”). In addition there are export loans which are excused if export prices too low.

The value of the American Farm bill goes up to 20 billion depending on the year. In terms of population and number of farmers not much to envy Europe.

To this we have to add a shift in supply in addition

America’s deficiency payments – famous graphs

URUGUAY ROUND WTO AGREEMENT

The GATT URUGAY ROUND INTRODUCED FOR THE FIRST TIME AGRICULTURE IN THE AGREEMENT

Key development were the OCED measures of support

… and the traffic lights.... AMBER BOX: bad distortive subsidies GREEN BOX: Non distortive (at least to a large

extent) subsidies .... EU had to come and get........ The BLUE BOX,

semi distortive taxes. Blue, not yellow.

After years of negotiations… EU reforms in 1992 – MacSharry reforms Intervention prices are cut to approach them to world

prices: Compensation payments are introduced Levies prices are eliminated and normal ad

valorem tariffs are introduced Sugar and milk quotas are slowly reduced

(price support is combined with quota to limit production…. Partially failed)

The payments were still partially linked to production (you need to produce the specific product to get it BLUE BOX) and based on historical yields. WTO not very happy due to production obligation.

EU has to make set aside land to reduce overproduction

WTO had amber and green box – EU created blue box

From compensation to overcompensation

Idea of temporary compensation was not taken Payments became institutionalised and linked to

farm practices – name changes to income support… then direct payments

World prices increased Distribution of funds highly unequal across EU and

highly regressive… a famous 20-80 relationship is presented by Agricultural Commissioner Fischler: 80% of funds to 20% of farms.

Before enlargement there was a new reform… called “mid-term review”. The payments were ‘decoupled’ to make them WTO compatible…. But still linked to historical payment size.

Accession and the Great Swindle

EU subsidises exports to candidate remained countries even after a double 0 tariff agreement. Eastern producers are put out of business, agri concerns are bought by western companies.

Next, the EU faces a problem. New member states have bigger problems and get EU structural and agricultural funds, but the budget needs to be kept stable. EU tried to deny direct payments – it failed (not compensation payments any more), but negotiates low costs with bad historical reference yields.

CAP made even more regressive, more money in less farms in %.

Impact of CAP reforms since 2003 strong shift Overall positive in term of trade

relations The CAP has left main controversial

areas Now the problem is internal CAP

coherence

Here is summary of reform impacts:

EU from OECD 2015 – 2014 monitoring data

JAPAN: EU from OECD 2015 – 2014 monitoring data

The CAP subsidy development

CAP cost and composition

The CAP today Cost to taxpayer: Commission -> Policy budgetary cost 0,5% of GDP

a year, total Producer Support Equivalent (PSE) (but TSE OECD 0,7% in 2013) + tariffs, costs of administration, national extras not included.

OECD calculates PSE, CSE, TSE. This are main calculations for trade agreements. WTO uses derivate Aggregate Measure of Support (AMS)

By today most production is decoupled. BUT WHAT MATTERS IS IF IF SUPPORT DOES

WHAT IT SAYS.

Source: European Commission:

CAP becomes unpopular The cost of the CAP and the regressivity of

the policy still puts pressure for reform. BUT… EU takes advantage of the world food

crisis (high prices and shortages) to declare the CAP a world food safety policy!

It proposes a rebalancing of payments East-West (very slow, over decades)

Declares the payments again a necessary tool due to low farm incomes… but is this really the case?

From compensation to divine right?

Direct payments were supposed to compensate for a fall in incomes due to a fall in support…. But for the main crops supported prices increased to levels beyond the ones under the policy support….

AGRICULTURAL COMMODITY PRICES 25 years

http://www.indexmundi.com/commodities/

http://capreform.eu/basic-direct-payments-for-eu-farmers-the-proposal-of-the-commission-of-the-eu/

Data manipulation?Agricultural income statistics EU

But, this is income from agricultural activity….

For all purposes of life we are taxed, get social security etc based on our total income, not income from one activity. Part time farming is in many countries the norm and farm household incomes are much higher!

Bavaria: 70% part time farmers with other income, often main income.

This data is not regularly providedJust once!

FOR USAthe same!

NEW CAP RATIONALE To preserve the food production potential on a

sustainable basis throughout the EU, so as to guarantee long-term food security for European citizens and to contribute to growing world food demand, expected by FAO to increase by 70% by 2050. Recent incidents of increased market instability, often exacerbated by climate change, further highlight these trends and pressures. Europe's capacity to deliver food security is an important long term choice for Europe which cannot be taken for granted.

NOVELTIES in latest reforma) More of the sameb) Transforms economic, environmental and territorial

challenges into tools to protect present systemc) Greening further the payments with contracts:

Cross compliance (min standards) & 30% for green actions (see slide)

d) Redistribution across countries to eliminate imbalance….. slooooooowly (see slide)

e) More funding for research and rural development funding for climate, other….

MAIN CHALLENGES AHEAD – EU Budget distribution and/or size

We need more rational use of resources