The CAP: origins, institutions and financing

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The CAP origins, institutions and financing

• Economics of Food Markets
• Lecture 7
• Alan Matthews

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Objectives

• The complex structure of EU agriculture
• The decision-making processes in the CAP
• How the CAP price support mechanisms work
• Characteristics of individual common market
  organisations
• The budgetary framework for CAP expenditure
• The green money mechanism
• A critical assessment of the consequences of the
  CAP

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Reading

• Ackrill, R. 2000 The Common Agricultural Policy
• Tracy, M., 1997 Agricultural Policy in the
  European Union and other Market Economies
• Fennell, 1997, The Common Agricultural Policy
  continuity and change
• Shucksmith, M., Thompson, K and Roberts, D.,
  2005, CAP and the Regions the territorial impact
  of the CAP
• Grant, W. 1997, The Common Agricultural Policy
• Ingersent, Rayner and Hine, 1998, The Reform of
  the Common Agricultural Policy.
• Commission DG Agriculture and Food website

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Differing agricultural structures
Source European Commission, The CAP Explained
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Employment Employment Employment Gross domestic product Gross domestic product Gross domestic product
1950 1973 1999 1950 1973 1999
EU-15 4.5 1.8
Belgium 12 3.9 2.4 8.8 4.2 1.2
Denmark 22 9.4 3.3 20.0 9.0 2.0
Germany 23 7.3 2.9 12.3 3.5 0.9
Greece 54 17.0 33.5 7.1
Spain 49 7.4 35.0 4.1
France 32 11.9 4.3 6.5 2.4
Ireland 40 25.1 8.6 31.3 19.0 2.9
Italy 39 16.3 5.4 29.5 9.9 2.6
Netherlands 19 6.6 3.2 12.9 5.8 2.4
Austria 32 6.2 16.4 1.2
Portugal 47 12.7 26.8 3.3
Finland 6.4 0.9
Sweden 18 3.0 7.0 n.a. 0.7
UK 5 2.9 1.2 6.0 3.0 0.9
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Number of farms Average farm size Average farm size Per cent of farms gt 50 ha Per cent of farms lt 10 ha
1997 1987 1997 1997 1997
000 ha ha
EU-15 6,989.1 18.4 8.6 68.6
Belgium 67.2 17.3 20.6 10.0 44.2
Denmark 63.2 32.5 42.6 27.8 19.5
Germany 534.4 17.6 32.1 14.1 45.6
Greece 821.4 5.3 4.3 0.4 90.0
Spain 1,208.3 16.0 21.2 8.2 69.0
France 679.8 30.7 41.7 29.7 35.3
Ireland 147.8 22.7 29.4 14.1 19.8
Italy 2,315.2 7.7 6.4 1.8 87.4
Netherlands 107.9 17.2 18.6 7.1 46.4
Austria 210.1 16.3 4.0 46.4
Portugal 416.7 8.3 9.2 2.3 87.5
Finland 91.4 23.7 8.8 24.2
Sweden 89.6 34.7 20.2 29.8
UK 233.2 68.9 69.3 33.7 26.8
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Brief history of CAP origins

• Article 33 (ex 39) set out objectives, but left
  open means to achieve these objectives
• Note all original member states already had
  protectionist agricultural policies, so EC was
  not starting with a clean slate
• Key decisions on market mechanisms taken in
  January 1962, though common prices not achieved
  until 1968
• Principles established
• Market unity
• Community preference
• Financial solidarity
• (Producer co-responsibility)

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CAP objectives and instruments

• CAP objectives set out in Article 33 (ex 39)
• 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
• Note no mention of environment, food safety or
  rural development
• Two broad policy instruments
• Price policy implemented through market
  organisation measures and funded by the Guarantee
  Section of EAGGF (FEOGA)
• Socio-structural measures funded by the Guidance
  Section of FEOGA
• Original expenditure ratio of 21 envisaged, in
  practice turned out to be nearer 955.

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Agricultural decision-making in the EU

• Distribution of powers between EU institutions
• originally Commission proposes, Council disposes,
  Parliament advises, and Court rules
• Greater EP powers of co-decision
• but only consultative powers on CAP expenditure,
  will change with Reform Treaty
• Role of member states and lobby groups
• Formalised through management and advisory
  committees
• Majority voting and the Luxembourg compromise
• Consensus decision-making encouraged by
  willingness of some member states to form a
  blocking minority when vital interests of
  another are at stake. Of doubtful current
  relevance
• Annual price review
• Based on formula approach in the past, now of
  much less significance because Commissions
  powers to manage markets increased under the
  Financial Perspective.

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Price policy mechanisms

• Cereals taken as the prototypical regime but each
  commodity regime has its own characteristics
• Three support pillars of import levies,
  intervention buying and export subsidies.
• Additional support through consumer subsidies,
  aids to private storage, withdrawals, deficiency
  payments
• Objective has been to provide price stability as
  well as price support, hence variable nature of
  trade instruments
• Mechanisms are in theory neutral as between
  farmers and consumers although price levels in
  practice set very high
• Support provided at wholesale, not farm, level.
  Assumes competition in commodity markets to
  reflect support back to farmers.

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Pre-GATT Uruguay RoundCAP mechanisms
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The green money (agri-monetary) system

• CAP prices fixed in ecus (euros), require
  conversion rates to national currencies
• Conversion rates used administered (green)
  exchange rates
• Devaluation should raise domestic prices,
  revaluation should lower domestic prices
• Governments manipulated green rates to prevent
  these market effects from occurring, thus causing
  market prices within the EU to diverge
• Differences compensated for by border taxes and
  subsidies (MCAs monetary compensatory amounts)

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The green money (agri-monetary) system

• Introduction of switchover system in 1984 at
  German insistence to prevent a cut in German
  nominal support prices meant a hidden upward push
  to support prices in that decade across the EU
  (extra 21 by 1992)
• Consequences of green money system and MCAs
• While intended to prevent trade distortions,
  created additional distortions due to limited
  coverage, inadequate compensation and
  possibilities of fraud
• Changes consequent to single market 1 January
  1993
• Abolition of MCAs and the switchover system
• Compensatory aid to farmers if prices cut by
  currency revaluation
• Now relevant only to countries outside euro zone

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Budget impact of the CAP

• The role of the EUs own resources currently
  customs duties, VAT-based contribution and the
  GNP resource
• Overall EU budget very small, but share of CAP
  spending very high
• Transfers between member states arising from
  common financing of the CAP inequitable and a
  source of controversy
• Attempts to control budget expenditure have been
  a significant driver of CAP reform

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Consequences of EU price support policies

• Growth in self-sufficiency due to supply
  outrunning demand
• Unforeseen reliance on intervention mechanisms,
  although currently much reduced
• Uneven levels of protection across commodities,
  particularly for cereals/oilseeds and cereal
  substitutes
• Regional disparities in support the North/South
  divide within the EU
• Introduction of milk quotas 1984 (until then,
  sugar was only CMO using quotas)

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Problems of agricultural price policy at
beginning of the 1990s

• 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, and more advantaged regions
  attract higher levels of support
• environmental costs of the CAP price policy
• higher prices encouraged intensification and
  greater input use