CAP reforms

1
CAP reforms

• Economics of Food Markets
• Lecture 8
• Alan Matthews

2
Objectives

• To discuss the elements and significance of
• The 1992 MacSharry reform
• 1994 conclusion of the Uruguay Round
• The 1999 Agenda 2000 reform
• The 2003 Mid-Term Review (Luxembourg Agreement)

3
Reform landmarks

• 1968 the Mansholt Plan
• 1977 prudent pricing policy and abandonment of
  the 'objective method' of price setting
• 1984 milk quotas
• 1988 agricultural stabilisers
• 1992 MacSharry reform
• 1999 Agenda 2000
• 2002 Commission's proposals for the Mid-Term
  Review of Agenda 2000
• 2003 Luxembourg Agreement (ongoing reforms in
  sugar, Mediterranean products and fruit and
  vegetables)

4
MacSharry reform

• MacSharry reforms cut support prices for cereals
  (29) and beef (15) in return for increased
  direct payments as compensation to farmers
• First time nominal cuts in support prices were
  introduced
• Accompanying measures
• Consequences
• Greatly increased significance of direct payments
• Extended role of supply management policies
• Initial over-compensation of farmers
• Permitted Uruguay Round to be concluded

5
Uruguay Round Agreement 1994

• Disciplines on agricultural support policies were
  a key negotiating item in the Uruguay Round of
  trade negotiations launched in 1986
• Final agreement 1994
• Converted import barriers into tariffs and
  reduced them by 36
• Set limits on the volume and value of export
  subsidies
• Set and bound ceilings on the total amount of
  trade-distorting support each country could
  provide to its farmers

6
Post-GATT Uruguay RoundCAP mechanisms
target price
threshold price
intervention price
export subsidy
Domestic support capped and reduced over time
world price
world price
Import
Internal
Export
7
Agenda 2000

• Part of wider EU package to prepare for
  enlargement
• But also to prepare EU for further round of WTO
  talks as well as integrate environmental and
  rural development concerns
• New statement of agricultural policy objectives
• Greater emphasis on the promotion of the European
  model of agriculture
• Rationale for farm transfers changing from income
  support to remuneration for provision of
  multifunctional public goods

8
Agenda 2000

• Further reductions in support prices for cereals
  (15), beef (20) and, for the first time, milk
  (15), again with increased partial compensation
  to farmers
• Stronger emphasis on rural development as second
  pillar of the CAP to complement the first
  pillar of market price support
• Tight budget limits established on CAP
  expenditure
• As negotiations proceeded, overall gain to
  Ireland

9
Commissions 2002 Mid-Term Review proposals

• CMO changes (mainly in arable sector)
• Dairy regime
• Decoupling of direct payments
• Strengthened eco-conditionality
• Modulation of direct payments from first to
  second pillars

10
Decoupling rationale

• Simplification of payment arrangements
• Encourages greater market orientation
• Reduces pressure on environment through
  intensification
• Improves efficiency of income transfer to farmers
• Makes it easier to extend CAP to accession
  countries
• Makes it easier to defend payments in WTO

11
Decoupling the mechanics

• Paid irrespective of production
• Though subject to requirement that land is
  maintained in good condition
• Eventual agreement allowed some partial coupling
  to be retained
• Eligibility determined by payments received in a
  reference year

12
Decoupling the options

• Start date After Jan 2005 but Jan 2007 by latest
• Design
• Basic (historic) approach
• Regional (flat rate) approach
• Mixed models (static and dynamic hybrids)
• Level of pasture must be maintained
• Not allowed to grow permanent crops, fruits and
  vegetables, ware potatoes on eligible land
• New Member States have option to continue with
  Single Area Payment Scheme (uniform payment per
  ha of agricultural land)

13
Decoupling the options

• Partial decoupling allowed under strict
  conditions
• Cereals (25 of arable aid) Beef (100 suckler
  cow premium, up to 40 of slaughter premium),
  Sheep 50 of ewe premium
• Olive oil and cotton
• Payment entitlements can be transferred
• Financial discipline mechanism

14
Modulation budget rebalancing

• Problem was how to increase funding of the second
  pillar within constraint of fixed overall
  agricultural budget
• Modulation already introduced as voluntary option
  for MS in Agenda 2000
• Commissions proposal to make modulation
  compulsory opposed
• Leads to redistribution within farming
• Leads to redistribution between member states
• Countries find it difficult to find the
  counterpart funds
• Second pillar schemes have high transactions
  costs
• Agricultural Ministers not necessarily keen on
  second pillar spending
• Problems in finding sufficient worthwhile rural
  development projects

15
Eco-conditionality

• Already introduced in Agenda 2000, but suspicions
  about the commitment of Member States to
  enforcing this
• Proposals cover
• The scope of standards to cover environmental,
  food safety, animal health and welfare,
  occupational safety
• The level of standards meeting mandatory
  standards or applying good farming practice?
• The monitoring of standards introduction of farm
  audits
• Mandatory for producers receiving more than
  5,000 in direct payments
• Financial aid for audits to be available

16
Decoupling the effects

• Output effects
• By how much will output fall
• Environmental benefits arise through more
  extensive production
• but danger of land abandonment in marginal
  farming areas
• Long term sustainability?

17
Mid-Term Review

• The story continues.
• Mediterranean products (2003)
• Sugar (2005)
• Fruits and vegetables (2006)
• Explanatory guide Department of Agriculture and
  Food website
• European Commission DG Agriculture and Rural
  Development website