Common Agricultural Policy

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 Demand
Home Supply
Home Supply
price
price
pss
Price floor (PwT, or PwT)
Price floor
T
T
B
A
Pw
C1
C2
Pw
Pw
Imports (with floor)
Q
Q
Zf
Cf
Z
C
Zf
Cf
Z
C
Imports (without price floor)
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Welfare Effects
Home Demand
Home Supply

• Consumer surplus falls by A C1C2B
• Producer surplus rises by A
• In addition, the EU as a whole gains tariff
  revenue (not shown here)

price
Price floor
B
A
C1
C2
Pw
Q
Zf
Cf
Z
C
5
Distributional Implications
price
price
price
Family farm supply curve
Commercial farm supply curve
Total supply curve
PwT
Atotal
Asmall
Abig
Pw
B
Q
Q
Zsmall
Q
Zbig
Ztotal

• 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 7.1 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
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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

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price
price
S1
S3
S2
S4
p1ss
p2ss
Price floor
p3ss
B
S
A
Price floor
a
c
e
b
d
C1
C2
Pw
p4ss
EU purchase
Home Demand
Q
Q
Zf
Cf
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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.

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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 ab
• Farmers lose -(abc)
• Budgetary savings bcd
• Net effect bd
• Oversupply eliminated
• Farmers may need to be compensated for their
  losses

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Solution Decoupling
15
CAP Reforms

• Supply control attempts
• 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 2004-2007.
• Similar to MacSharry reforms in spirit.

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CAP Today

• Two pillar structure
• Direct payments and price support
• Rural Development
• 2007-2013 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

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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 Queens CAP payments?
• http//shop.ceps.be/BookDetail.php?item_id1285

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CAP supports inequity