COMMON AGRICULTURAL POLICY OF THE EUROPEAN UNION

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 objectivesand subsidy programmes relating to agricultural production, rural development and the environment. • Itis the biggest single item in the EU budget, accounting for around €55bn a year, or 40% over the current2007 – 2013 EU budgetary framework period.

5. ShortHistory • In 1957, when the Rome Treaty establishedthe 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 andadoptedin 1960 by the European Commission • CAP cameintoforce in 1962

7. MajorPrinciplesof the CAP • Market unity • Communitypreference • Financialsolidarity

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 AgricultureDifferent? • 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 egcereals • Sets Targetprice, Thresholdprice and Interventionprice • 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. * Assumptions P S Target price Ptarg Pe Pw World price * D Q cereal

13. 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 Pthexceedsworld 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 • Pinvchanges 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 itsownsuccess • Artificial pricing system rewards high production: “buttermountains, winelakes” • Costs: 70% of EC budgetuntilearly 1980s (87% in 1970) • High prices for consumers • Environment • Pressure fromWTO • Farmers become ‘rent seekers’

23. CAP Reforms

24. EarlyAttempts: MansholtPlan • 1968: SiccoMansholt, the European Commissioner for Agricultureoffered the'1980 AgriculturalProgramme‘ • Suggestedthat production methods should be reformed and modernised • Aim was to encourage nearly 5 million farmers to give up farmingviavocationaltrainingmeasuresandearlyretirement. That would make it possible to redistribute their land and increase the size of the remaining family farms • Calledon the Member States to limit direct aid to unprofitable farms • angry reaction of the agricultural community, scopelimitedtomodernisation

25. MacSharryReforms • 1992: European Commissioner for Agriculture, Ray MacSharry • need to design the CAP according to the GATT principles. • Aims: • to limit rising production, • adjustingto the trend toward a more free agricultural market. • MacSharryreforms 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. MacSharryReforms • 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, arablefarmers 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. RuralPolicy • 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 FischlerReforms • led to a further shift away from intervention in agricultural markets, whilestrengthening the rural development aspect of the CAP. • ‘decoupled’ directpayments from production via the SinglePaymentScheme (SPS). • allowed member states to shift funds (although only upto 5%) away from direct payments towards rural development (modulation).

32. 2008 Reforms: HealthCheck • Furtherincremental reforms to shift the CAP away from market interventions and direct payments to farmersand landowners, towards Pillar 2 objectives, by planning the withdrawal of milk production quotasby 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 bna 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 orderto stimulate growth and employment • Tools to address crisis management whichare more responsive and better suitedto meet new economic challenges • A ‘Green’ payment for preserving long-termproductivityandecosystems • Additionalinvestment in researchandinnovation • A more competitive and balanced food chain

42. Future of CAP: Further Reform Proposals • Encouragingagri-environmentalinitiatives • Facilitatingtheestablishment of youngfarmers • Stimulatingruralemploymentandentrepreneurship • Betteraddressingfragileareas • A simpler and more efficient CAP