EU agricultural policy

1
EU agricultural policy

• Lecture outline and objectives
• To explain the objectives of EU intervention in
  agricultural markets
• To describe the mechanisms of EU agricultural
  policy and some of the problems caused by these
  mechanisms.
• To outline the various pressures to reform EU
  agricultural policy
• To explain the way recent reforms of the CAP
  address these problems and pressures

2
Objectives of the Common Agricultural Policy

• Article 39 objectives
• to increase agricultural productivity
• to ensure a fair standard of living for the
  agricultural community
• to stabilise markets
• to ensure the availability of supplies
• to ensure that supplies reach consumers at
  reasonable prices
• Instruments of the CAP
• - price and markets policy (FEOGA Guarantee
  Section)
• - socio-structural and rural development policy
  (FEOGA Guidance Section)

3
Rationale for agricultural policy

• instability of agricultural markets
• cobweb models of price instability
• food security
• structural falling behind of farm incomes
• low price and income elasticities of demand
• supply shifts due to technological advances cause
  relative farm prices to fall
• limited labour mobility because resources are
  trapped in agriculture
• maintenance of the rural population
• environmental and landscape benefits - the
  multifunctionality of agriculture

4
Pre-GATT Uruguay RoundCAP mechanisms
target price
threshold price
intervention price
variable levy
export subsidy
world price
world price
Import
Internal
Export
5
Problems of agricultural price policy

• an uncommon market
• a single agricultural market was created, but ...
• green currencies kept prices different and...
• veterinary and plant health rules kept the market
  fragmented
• growing overproduction and intervention overload
  ...
• leading to growing budget costs
• the inefficiency of CAP price policy
• large transactions costs incurred to transfer
  income support
• the inequity of CAP price policy
• larger farmers benefit at the expense of low
  income consumers
• environmental costs of the CAP price policy
• higher prices encouraged intensification and
  greater input use

6
Welfare cost of CAP price support to EU
P
Welfare effects
Consumers -a-b
a
c
Producers abc
b
d
Taxpayers -b-c-d
Overall -b-d
Q
7
Welfare cost of CAP price support to Ireland
P
Welfare effects
Trade transfer
Budget transfer
Consumers -a-b
a
c
e
Producers abce
b
d
Overall ce
Note Net gain to Ireland arises from EU
financing of export surpluses
Q
Intra-EU exports
Extra-EU exports
8
World market effects of the Common Agricultural
Policy

• Because the EU is a large player in world
  markets, the welfare analysis must be augmented
  by a terms of trade effect (gain for imported
  commodities, loss for exported ones)
• Higher internal prices lead to depressed world
  prices
• More stable internal prices lead to more volatile
  world prices
• Preferential agreements (Cotonou, previously
  Lome, Convention, Europe Agreements) allow some
  privileged exporters to benefit from higher
  internal prices, through the rents often accrue
  to importers.

9
Pressures for change (1)- International pressures

• EU agricultural policy attacked for its effects
  on other exporters
• 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
• - Doha round of trade liberalisation
  negotiations - prospects after Cancun?

10
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
11
Pressures for change (2)- internal momentum for
change

• Driven initially by rising budget costs and the
  need to control production
• MacSharry reforms in 1993 cut support prices for
  cereals (29) and beef (15) in return for
  increased direct payments as compensation to
  farmers
• The Agenda 2000 agreement continued this approach
  with further cuts in support prices for cereals
  (15), beef (20) and, for the first time, milk
  (15), again with increased compensation to
  farmers
• More CAP resources shifted into the accompanying
  measures agri-environment schemes,
  afforestation and rural development

12
Pressures for change (3)- Impact of the wider EU
agenda

• Introduction of the single market led to
  elimination of border controls and technical
  barriers to trade, which were particularly
  prominent in trade in food and agricultural
  products
• Need to adjust the CAP to accommodate the entry
  of central and east European countries with large
  agricultural sectors led to the Agenda 2000
  agreement to cut support prices further
• Growing pressures to modify the CAP to take on
  board food safety (especially in the light of the
  BSE crisis), animal welfare and environmental
  concerns.

13
The CAP Mid-Term Review 2002

• Rationale
• Public expectations and demands of farmers are
  changing
• To prepare EU agriculture for enlargement and
  next WTO round
• Decoupling
• Direct payments to be paid to farmers
  irrespective of the level of production on
  farms..
• leading to lower production, less environmental
  stress and more efficient income transfer
• Environmental conditionality
• Farmers must adhere to environmental, food
  safety, animal welfare standards, otherwise
  payments can be reduced
• Modulation
• Refers to the transfer of money from direct
  payments (Pillar 1) to rural development (Pillar
  2) by reducing payments to larger farms over 6
  years

14
EU agricultural policy current challenges

• Absorbing the new member states
• Implementing CAP income support mechanisms
• Safeguarding the single market in food products
• Continuing the process of internal reform
• Sugar, Mediterranean products yet to be covered
• Future of dairy quotas
• Pillar 1 agricultural budget now fixed until 2013
• The Doha Round
• Is the Mid-Term Review sufficient to allow the EU
  to conclude a Doha Agreement?